Volume Discount

Updated on January 4, 2024
Article byNiti Gupta
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is Volume Discount?

Volume discount is a percentage of the amount waived off and offered to customers to incentivize them when they purchase many products at once, i.e., when they place a bulk order. The sellers provide each product unit at volume discount pricing, which is a value lower than the regular price to the buyers when they place a bulk order.

Volume Discount

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Source: Volume Discount (wallstreetmojo.com)

The price that is discounted or foregone is reduced in the bill itself and not recorded separately. It is treated as an amount reduced within the invoice or bill. While there are a handful of types of such discounts, tiering is the most common form where exceeding a specific unit of a single product attracts a discount.

Volume Discount Explained

Volume discount is a common practice in business that when the customers place a bulk order, sellers offer them a discount on a large volume of an order placed. This is done to encourage the customers to buy a large quantity of a product and save costs. Further, this phenomenon helps trading and manufacturing businesses reduce their inventory by selling more units of products at a reduced price.

The discount rate can vary for different orders placed based on the volume of products ordered by the customer. As the discount is based on the volume of the order, the term volume discount is used.

There can be many examples of volume discounts that we can find in our day-to-day lives. Like when we go to a shopkeeper and ask for a few products of our choice, the shopkeeper tells us that there is an ongoing scheme in which, if we buy three packs of a particular product together, we will get a reduced rate per unit. This is just a small example that frequently happens when we go shopping.

Corporate buyers are large companies like Amazon and Walmart that purchase finished products in bulk from manufacturers or wholesalers and get attractive discounts, ultimately passing them on to the customers. Brokerage firms also offer it on the commission charges on a profitable trade when a consumer has made huge investments.

This is one of the most popular promotional strategies, and if it is used properly, it could create a win-win situation for all the parties involved. But sometimes, firms go for volume discounts without giving them proper thought. Instead, they should look into why they want to provide a discount and how it will benefit them and the business before going for it.

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Types

Depending on the type of product or the nature of the business, the volume discount calculator is used differently. Let us understand the different types through the points below.

  1. Tiered Discount: In this type of volume discount, the discount differs as per the tier in which the number of units falls. For example, for up to 100 units, a 5 % discount would be given; for 100 to 200 units, a 10% discount would be provided.
  2. Threshold Discount: In this structure, a discount is offered once the order reaches a certain threshold. For example, a discount is given when the number of units purchased is 100 or more; below that, no discount is offered.
  3. Package Discount: In this method, a discount is offered when a customer purchases a set of a predefined number of units together (say 20). If the customer purchases any quantity less than the set (say 19), he won’t get any discount. Also, if the customer purchases extra units that do not form a set itself (say 21), the extra unit above the set (i.e., 1 unit) will be given at full price without discount.

Examples

Let us understand the concept in detail with the help of a couple of examples. These examples would help us understand volume discount pricing in depth.

Example #1

To make the most of the holiday season and widen their customer base, they were looking for strategies to outplay their competitors and gain a significantly bigger market share than the previous year.

The sales team’s target was to clock $1 million in revenue in the month of December.

LMN supermarket has an offer for its customers where purchase of any product of 10 units or more would automatically receive an additional discount of 5% over and above product discounts.

As a result, many customers who were regulars at a competitor’s store came to LMN to shop this year. The revenue breached $1.5 million in the last week of December alone.

Example #2

Steel prices globally had doubled in 2022-2023 due to multiple reasons such as the Russia-Ukraine war, supply chain disruptions, and so on.

This caused distress to Micro, Small, and Medium Enterprises (MSMEs) across the globe. Therefore, steel manufacturers in India decided to consider providing a volume discount of INR 3,000 per ton of steel for their MSME clients.

Table

This table details the discount offered on the number of units purchased according to the type of structure based on which discount is allowed. The following discount table can be referred to as an example; it is based on a tiered discount structure used for volume discount calculator.

Volume Discount Table

Here, no discount is offered for an order containing less than ten units.

Journal Entry

While the volume discount pricing is deducted in the bill itself, the overall discount provided to customers needs to be accounted for documentation and filing purposes. Let us understand its journal entry through the discussion below.

Volume discount is treated as a trade discountTrade DiscountThe reduction in list price allowed by a supplier to the consumer while selling the product in bulk quantities is referred to as a trade discount. It is carried out in order to boost the sale of the business.read more in the accounting books. The discount amount is deducted from the purchase amount and is not recorded separately. Let us take an example based on the above discount table. Suppose a buyer purchased 100 units whose original price was $20 each. After applying a volume discount of 20%, the reduced price for each unit would be $16 per unit. So, the buyer in their accounting books would debit the purchase with $1,600 (not $2,000) and credit trade payable for $ 1,600. The discount figure would not be shown separately.

Dr. Purchases – $1,600

Cr. Trade Payable – $1,600

Advantages

Apart from increased volume of sales, there are various advantage of inculcating the volume discount calculator for businesses and its customers. Let us understand them through the discussion below.

  • It helps in being competitive in the market and sometimes beating the competition. Volume discount is one of the most popular promotional strategies that manufacturers use nowadays.
  • It helps in attracting a large customer base. If a high-quality product is offered at a discounted price, it will attract more customers.
  • It encourages customers to place bulk orders to get attractive discount rates and, in turn, helps sellers to reduce their inventory.
  • Finally, it helps establish a brand name and market share.

Drawbacks

Despite the various advantages mentioned above, there are factors from the other end of the spectrum that act as hassles. Let us understand the disadvantages of volume discount pricing through the explanation below.

Recommended Articles

This has been a guide to Volume Discount & its meaning. Here we explain its examples, table, & how it works with a journal entry, advantages, & drawbacks. You can learn more about it from the following articles –