What is Volume Discount?
Volume discount is a discount offered to the buyers to incentivize them when they purchase a large number of products at once i.e. when they place a bulk order. The sellers provide each unit of product at a price lower than the regular price to the buyers when a bulk order is placed by them.
Explanation
It is a general practice in business that when the customers place a bulk order, sellers offer them discount on account of 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 in reducing their inventory by selling more units of products at a reduced price.
The rate of discount 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.
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How Does It Work?
- Tiered Discount: In this type of volume discount, discount differs as per the tier in which the number of units falls. For example, up to 100 units, a 5 % discount would be given, for 100 to 200 units a 10% discount will be provided and so on.
- 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.
- 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
There can be many examples of volume discounts which we can find in our day-to-day lives. Like when we go to a shopkeeper and ask for few products of our choice, the shopkeeper tells us that there is an ongoing scheme as per 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, Walmart that purchase finished products in bulk from the manufacturers or wholesalers and get attractive discounts on them, which they ultimately pass on to the customers. It is also offered by brokerage firms on the commission charges on a profitable trade when a consumer has made a huge amount of investments.
Volume Discount Table
This table details the level of 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.
Here, no discount is offered for an order containing less than ten units.
Journal Entry
Volume discount is treated as a trade discount in the accounting books. The amount of discount 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 his or her accounting books would debit 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
- It helps in being competitive in the market and sometimes beating the competition. Volume discount is one of the most popular promotional strategies that manufacturer uses nowadays.
- It helps in attracting a large customer base. If a high-quality product is offered at a discounted price, it will definitely attract more customers.
- It encourages customers to place bulk orders to get attractive discount rates and, in turn, helps sellers to reduce the inventory.
- Finally, it helps in establishing a brand name as well as market share.
Drawbacks
- It leads to a reduction in per-unit price, which impacts marginal profit for the period.
- It can lead to the perception that product lacks in quality as it is a perceived notion that for good quality products, one has to pay more.
- It can lead to a price war between sellers, which ultimately results in customers going for the lowest price in the market, which smaller firms are unable to provide.
Conclusion
This is one of the most popular promotional strategies, and if it used properly, it could create a win-win situation for all the parties involved. But sometimes firms go for volume discount without even giving it a proper thought. Instead, they should look into all the reasons they want to provide a discount and how it will benefit them and the business before going for it.
Recommended Articles
This has been a guide to What is Volume Discount & its Definition. Here we discuss the volume discount table, examples, and how it works along with journal entry, advantages, and drawbacks. You can learn more about from the following articles –
