What is Quantity Discount
A quantity discount is an incentive offered to a buyer that results in a decreased cost per unit of goods or materials when purchased in greater numbers. A quantity discount is often offered by sellers to entice buyers to purchase in larger quantities. The seller is able to move more goods or materials, and the buyer receives a more favorable price for the goods. At the consumer level, a quantity discount can appear as a BOGO (buy one, get one discount) or other incentives such as buy two, get one free.
BREAKING DOWN Quantity Discount
Retailers often get better deals if they order more of the same item. For example, the cost per unit for t-shirts might be $7.50 per unit if less than 48 pieces are ordered; $7.25 per unit if 49-72 pieces are ordered; or $7 per unit if 73 or more pieces are ordered. Depending on the quantity discount, all pieces ordered must be delivered and paid for by a certain date, or the purchases and payments can be spread out over a specified period of time.
By ordering in larger quantities, the seller can increase their revenues per transaction. The seller can also scale quantity discounts in "steps," with lower per-unit prices at higher quantities to encourage bulk buyers. For instance, a coat maker that employs "steps" in its pricing strategy could offer shirts at $20 each, five for $90 and 10 for $160. The primary drawback of quantity discounts is that the discount reduces the profit per unit, also known as the marginal profit. So, if the per-unit cost for the coat company is $10, the company makes $10 profit on every single-shirt $20 sale. However, with the quantity discounts, it makes only $8 in marginal profit on an order of five and $6 in marginal profit on an order of 10.
Quantity Discount vs. Linear Pricing
A linear pricing strategy is simpler to manage for business owners than quantity discount pricing. That's because it maintains the marginal profit on each item. For instance, consider a T-shirt company that employs linear pricing would sell a single shirt for $20, five shirts for $100 and 10 for $200. If each shirt costs $10 to make, each shirt will bring in $10 in marginal profit, regardless of how many are sold in an order. The primary drawback of linear pricing is that it does not provide an incentive to buy in larger quantities. When customers order only single items, the price per transaction stays the same. Linear pricing also denies the business owner the opportunity to take advantage of economies of scale. Larger quantities allow businesses to combine incidental per-unit costs, such as shipping and packaging, into one order.