Quantity discount definition
/What is a Quantity Discount?
A quantity discount is a reduction in the price of a product if the buyer chooses to acquire goods in a large quantity. This discount may be issued by the seller to the customer at a later date in the form of a credit, after the full amount has been delivered. For example, a customer intends to order 2,000 widgets over a three-month period. The seller waits for the period to be concluded before tallying the amount delivered to the customer, and then issues a credit based on the unit quantity delivered. Alternatively, the discount may be applied to a single delivery of goods, in which case it is deducted from the invoice sent to the customer.
Advantages of Quantity Discounts
A quantity discount may be offered by a seller for a number of reasons. For example, the seller may be trying to reduce the amount of its on-hand inventory, which is in danger of becoming obsolete. Or, it wants to schedule a long production run to reduce its per-unit costs, and so offers quantity discounts to its customers to see who is interested. The outcome may be a substantial increase in production volume, which can permanently lower the seller’s per-unit costs, allowing it to set lower prices and thereby gain market share.
Quantity discounts can be used to retain larger customers over the long-term. As long as the discount offered is competitive and the seller maintains a reasonable quality level, the discounts may be its main tool for customer retention.
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Disadvantages of Quantity Discounts
The main problem with quantity discounts is that they can trigger significant declines in the profitability of the seller, since they reduce the total price being offered. This is a major concern when a seller’s gross margin is already relatively small. Further, quantity discounts tend to attract customers who will only be retained through continuing offers of discounts; if these offers are withdrawn, then the customers will stop ordering from the seller.
From the perspective of the buyer, taking quantity discounts can result in inventory storage problems, especially for bulkier goods. In addition, the buyer takes on the risk of product damage and obsolescence, since the excess quantity may be stored in its warehouse for an extended period of time.
Example of a Quantity Discount
A seller offers a 10% discount if customers buy at least 100 purple widgets. The normal retail price of this widget is $10. A customer buys 100 units. The resulting price paid is a gross amount of $1,000 (calculated as $10 x 100 units), from which the 10% discount is subtracted to arrive at a net price of $900.
Terms Similar to Quantity Discount
The quantity discount is also known as a volume discount.