Volume discounts are both a standard business practice and a standard customer expectation in many industries, but it is likely that this is harming both the business and the customer. Skeptical? Good! But please read on anyway.
So, how is this bad for your business? Let’s start with the obvious: you are getting paid less per part. Let me repeat: you are getting paid less per part. This is the old “we’ll make it up on volume” argument. I was taught to use extreme examples to demonstrate faulty logic. The idea is that if the logic doesn’t hold up in extreme examples, you should probably rethink it. In this case, you are providing lower prices as the order size increases. But where does it end? Clearly there is an order size that is too big to handle a price that is too low. Using volume discount “logic” taken to the extreme, as the order size approaches infinity, the cost per part approaches zero. If the order size can become too big and the price can become too low, is this really a pricing model that makes sense? The next problem is that this encourages other bad decisions. One is that businesses tend to start early to work on big orders. This can create a cascade of scheduling and resource contention issues in production. Really big orders can also require extra capacity in the form of outsourcing, overtime, temporary workers, etc., which increases operating costs. Salespeople may also get a bigger commission on bigger sales which further cuts into profits. You are effectively paying the salespeople a higher commission the more they lower your profit margin. Does that make sense?
The only logical conclusion is that customers should pay MORE if they are a large part of your business because you are taking on more risk by putting all your eggs in one basket. They are also hogging your resources! This makes you less responsive to the needs of other customers. Your lead times for other customers may increase, leading to reduced customer satisfaction overall. There is a cost for this type of service, and you should be adequately compensated.
As I said, this may also be harming the customer. If your customer’s purchasing department is like most, they are pressured to reduce line-item costs. If the only way they can do this is to buy more, they will usually do so, whether they really need it or not. This leads to bloated inventory which creates problems that can end up costing more than the material savings (e.g. lead time, overproduction, obsolescence, etc.). If you investigate this a bit, you can use this information to explain to the customer why it is in their best interest to make a series of smaller purchases, even if the cost per part is higher, because it will benefit them in other ways.
I’m not a fan of discounts in general, but if you feel you want to offer discounts here are two scenarios that I do condone. 1. Early payment. I personally offer a 10% discount on large projects if it is all paid up front. 2. Repeat business. Instead of offering a discount on the purchase of 10,000 widgets, offer a discount on 10 orders of 1000. The key is that you don’t have to deliver all 1,000 at once, but instead get to spread it out. This makes it less likely for you to make some of the bad decisions listed above that increase your operating costs. If you ask, you may find that many customers actually prefer a number of small shipments instead of one big one. And if you’re thinking “but Dave, I like the big order because of the efficiencies”, I will refer you to my blog titled Don’t Be Efficient to see why this is problematic.
Don’t give a volume discount,