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Every e-commerce merchant strives for one thing above all: increased sales.
However, achieving this without sacrificing profitability can often be a challenge. Because more sales don’t always translate to higher profits.
However, with the right pricing, it is possible. Volume pricing is one ideal strategy. When executed effectively, it can help sellers incentivize buyers to purchase larger quantities of products in a single order, thereby increasing sales and profit margins.
This leads to a win-win situation where buyers are happy to bag a better deal for buying more, and sellers make more money because the costs go down per item, leading to increased profitability.
This blog talks about the nits and grits of volume discount, its benefits, and how you can set a profitable volume discounting structure for your online store.
What is Volume Discount?
The more a customer buys, the less they pay per item.
That’s volume discounts for you.
This pricing strategy not only encourages larger purchases but also increases the average order value (AOV), contributing to increased revenue.
Volume discounting taps into the buyers’ love for value and the feeling of snatching a better deal when buying in bulk. This in turn triggers a sense of satisfaction and encourages them to buy more to get greater savings.
Volume discounts benefit both the buyers and sellers:
- Buyers can save money by buying in bulk, making them purchase more items at once. This can be particularly appealing for businesses or individuals who regularly use certain products.
- For sellers, implementing volume discounts can increase sales volume and revenue as customers are encouraged to buy more products in a single order. It also helps clear out excess inventory, saving on storage costs while simultaneously keeping customers happy.
Volume discounts can also vary in their structure. It can be tiered, meaning the discount increases as the volume purchased increases. Or a flat percentage reduction applied to the entire order once a certain volume is reached.
To sum it up, volume discounting aligns with consumer preferences, boosts sales volume, and improves the seller's competitive positioning in the market.
Key Components of Volume Discounting:
Quantity Tiers: When it comes to volume discounting the higher the items purchased, the greater the amount of discount offered. Meaning that they are generally offered in tiers based on the quantity of products bought. So, let's say a brand is offering you a 10% discount if you buy 3 units or more, but a 20% discount for buying 5+ units - that’s exactly how volume discount works.
Discount Levels: Each quantity tier will have a discount percentage or an amount. It can be a fixed amount per unit, like $30 off on the purchase of 3 units. Or it could also be a percentage of the total purchase price. That being said, the discount you want to offer can be different, considering your brand's profit margins, production cost, etc.
Minimum Order Quantity (MOQ): Some volume discount programs also have a minimum order quantity (MOQ) that a customer must meet to get the discount. This way you can make sure that you only offer discounts to those customers who are placing large enough orders to justify the reduced price.
Duration and Conditions: In many cases, discounts aren't available all the time or for every product. They may only be applicable for specific products for a limited duration. Or there can be certain conditions attached to the discount, such as seasonal promotions, bulk orders, etc. This can help your eCommerce brand trigger FOMO in your buyers so they make purchases fast before times run out.
5 Key Steps to Set Up a Volume Discounting Structure
Setting up a volume discount pricing for your online store requires a clever and strategic approach that considers both customer needs and your business goals. Here’s a tried and tested approach that you can follow:
1. Know Your Costs
You can't effectively implement the volume discounting structure unless you have a clear understanding of your cost.
Here’s what you can do to know your costs better:
- Direct Costs: Understand how much it costs to produce or acquire your product. This should include materials, labor, and any other direct expenses associated with production.
- Calculate Indirect Costs: Factor in all indirect costs, including rent, utilities, salaries, marketing expenses, and any other overhead costs incurred in running your business.
- Determine Profit Margin: Once you've calculated your costs, set a target profit margin for your products. Doing this will help make sure that the volume discount you offer still allows you to maintain profitability.
2. Analyze Customer Behavior
You need to know your customers in order to sell them products. What are their buying habits? Do they buy frequently? Do they spend a lot of time researching before actually buying the product? Or are they impulsive buyers?
You must have answers to these questions to tell which products could be eligible for a volume discount and what tires may seem the most appealing to them.
Start with:
- Reviewing Sales Data: Analyze past sales data to identify the products that are frequently purchased together or in large quantities.
- Segment Customers: Divide your customer base into segments based on purchase frequency, order size, and buying preferences.
- Survey Customers: Get feedback by conducting surveys to understand the types of discounts your customers like the most.
3. Define Discount Tiers
After getting a clear understanding of your costs and customer behavior, you can now start defining your volume discount tiers.
What’s next?
- Start Conservative: Begin with lower discounts and gradually increase them as you test the program and see customer response.
- Set Discount Levels: Decide the discount levels you want to offer for each tier. Again, this could be a fixed percentage discount, a flat dollar amount of the total purchase, or a combination of both.
- Consider Order Value: Other than quantity-based discounts, you can also try offering discounts based on the total value of the order. For example, offer a 15% discount for orders over $100.
4. Consider Margins and Profitability
Crafting a winning volume discount strategy for your e-commerce store requires balancing increased sales with healthy profit margins. Before diving into discount tiers, take a step back to analyze your product costs.
What can be done to ensure that?
- Calculate Profitability: Understand the impact of volume discounts on your profitability by analyzing how the discounts affect your cost per unit and overall profit margins. Profit margin is the net income you aim to make on each product after covering all expenses. There are different ways to calculate profit margin, but a simple formula is:
Profit Margin (%) = (Selling Price - Total Cost) / Selling Price * 100
- Adjust Pricing if Necessary: If implementing volume discounts greatly impacts your profitability, reduce your pricing or discount levels so that better margins can be achieved.
5. Communicate Clearly
Transparency is key when it comes to communicating your volume discounting structure to your customers. So, clearly outline your discount tiers and terms in your marketing collaterals, online store, as well as at the point of sale.
Pro-tip:
- Update Marketing Materials: Update your online store, advertisements, and other marketing materials to reflect the new volume discounting structure.
- Educate Staff: Ensure that your sales and customer service teams are aware of the discount tiers and terms so they can effectively communicate them to customers.
6. Monitor and Adjust:
Setting up a volume discount structure is an ongoing process. To make it effective and get the best out of it, monitor the performance of your discounts and make adjustments as needed to get better results.
Here’s what you can do:
- Track Sales Data: Monitor sales data to see how the volume discounts are impacting sales volume and profitability.
- Gather Customer Feedback: Get feedback from customers to learn how they like the discounts and whether they find them appealing.
- Make Adjustments: Based on your analysis and feedback, make adjustments to your discount tiers, pricing, or terms as necessary to improve results.
How to Offer Volume discounts on your Shopify Store?
Using Shopify's Built-in Features
Shopify allows merchants to set up discounts on the platform. You will need to create discount codes that your customers can apply during checkout when they buy a product. You can also choose a name for your discount code.
You can choose your preferred discount type among options like percentage discount, dollar value discount, free shipping discount, or buy X get Y. You can also select whether the discount code would be applied to an entire order, category, or product.
Another important thing to consider while creating your discount code is to check whether you have multiple discount codes for one product.
Shopify’s inbuilt discount feature also lets you set eligibility criteria wherein you can set the minimum number of items or a certain amount that customers need to surpass in order to get the discount. It is also important to note that these discounts are applied on a product level and only allow for limited customization options compared to third-party solutions.
Using Shopify Apps:
For more advanced functionalities and customization, you can choose third-party apps like Kite from the Shopify App Store. Shopify has a wide range of such apps that provide further customization options allowing you to create tiered pricing, set specific discount amounts or percentages, or apply discounts to various product variants.
Kite comes packed with powerful in-app features like tiered & volume discounts with quantity breaks, stackable discounts, discounts on collections, and Buy X, Get Y discounts and BOGO offers. The best part about using Kite is that you get the ability to completely customize the UI and widget that aligns with your store's brand identity.
Skai Lama’s suite of Shopify apps is carefully built to help your store boost AOV, retention, and overall customer satisfaction. Check out our apps here to see how we can help your Shopify store succeed.
Pro-Tips for Offering Volume Discounts on Your Shopify Store
Volume discounts can be a powerful tool for driving sales and encouraging customer loyalty on your Shopify store. Here are some tips for effectively applying volume discounts on your Shopify store:
Structure Your Discounts for Success
Start by simplifying your setup. Leverage Shopify apps or plugins designed for volume discounts. These tools make it easy to customize discount rules based on your needs. Next, experiment with different discount structures. Try percentage-based discounts, fixed-amount discounts, or tiered discounts based on total order value. See what resonates best with your customers.
Reward Loyalty and Continuously Optimize
Volume discounts are a great way to reward your loyal customers and strengthen relationships. Offer exclusive discounts to VIP program members or frequent buyers. This incentivizes repeat purchases and builds brand loyalty.
Monitor metrics like conversion rates, average order value, and revenue generated from volume discounts. Use this data to identify areas for improvement and continuously optimize your discounting strategy over time. A/B testing is key for optimization.
Boost Sales with Smart Strategies
Use volume discounts as an opportunity to upsell or cross-sell related products. Recommend complementary items to customers who are already buying in bulk. This increases their overall order value and maximizes the impact of the discount.
You can also promote your volume discounts across various marketing channels. Include them in email campaigns, social media posts, and website banners.
Volume pricing is one great strategy that can help sellers boost their AOV and overall profit while simultaneously making their customers happy so that they keep coming back for me. If you’re looking forward to implementing a volume pricing strategy or just want to have a chat about growing your Shopify store, get on a call with us.
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