What is Volume Discount?

Explanation

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It is a general 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.

How Does It Work?

  • 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.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 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 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.

Volume Discount 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.

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

Journal Entry

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 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 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

  • It leads to a reduction in per-unit price, which impacts marginal profit for the period.It can lead to the perception that the product lacks quality as it is a perceived notion that one has to pay more for good quality products.It can lead to a price warPrice WarA price war is a competition among the competitors of the business in lowering the price of their products to gain an advantage over their competitors in price and capture a greater market share. It is used as one of the strategies to increase the business firm’s revenue and increase the market share.read more between sellers, which ultimately results in customers going for the lowest price in the market, which smaller firms cannot provide.

Conclusion

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 it a 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.

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 it from the following articles –

  • Revenue ManagementCash DiscountInvoice DiscountingDiscounting FormulaDiscount Broker