Quantity discount is an important concept when purchasing products from China. This guide breaks down the quantity discount, why suppliers have quantity discounts and how to calculate quantity discount for the most cost-effective way to purchaseproducts.

What is a quantity discount

 

When a business makes a purchase of a large amount, the supplier often charges less per item. This is the quantity discount, bulk discount or volume pricing.

 

The easiest way to understand quantity discount is the more a business buys, the less they pay per item.

 

Why does the supplier offer quantity discounts?

 

The quantity discount analysis is important for buyers and suppliers. The supplier sees quantity discounts in the following ways:

 

1. Quantity discounts from the supplier are used specifically to encourage larger product purchases.  The lower prices offered for larger purchases are often enough to have buyers place a larger order.

 

2. Quantity discounts do reduce sales and supplier profits, but reduce the costs of warehousing and logistics. This yields better product turnover.

 

3. Suppliers build solid relationships with customers with discounts. This saves on marketing, development and allows for long-term benefits.

 

Each supplier struggles to find the “sweet spot” price in quantity discounts. The “sweet spot” is the discount grade and rate that gets buyers to buy in larger amounts.

 

This is the supplier’s issue and not Sourcing Nova’s. Our goal is finding the most cost-effective purchase amount for you and for the supplier. After all, it is important that both sides are pleased in a business transaction.

 

Quantity discount analysis

 

The supplier’s quantity discount lowers the buyer’s product costs by buying in larger amounts. The buyer needs to do a quantity discount analysis to determine the maximumdiscount available. Without a discount analysis, purchasecosts may increase. If you are not sure what Sourcing Nova means, (please give us an example.)

 

Quantity discount example

 

Here is an example supplier discount quotation: 1~9 $7.25 ea./10~99 $4.90 ea./100~999 $4.10 ea./1,000~3,000 $3.20 ea./3,001 and up $2.88 ea.

 

Our buyer wants 908 pieces.  What will the price per item be?

 

The first thought: purchase quantiy x unit price = purchase amount.

 

The first mistake: 908 x $4.90 = $3,722.80 (This is the most common mistake.)
The second mistake: 8 x $7.25 = $58.00 and 900 x $4.10 = $3,960.00 Total of the two: $3,848.00
Your Sourcing Nova professional purchasing agent thinks: If I buy 1,000 pieces, the unit cost drops to $3.20 ea., the price is $3,200.00.  This saves considerable money, and I get 92 more products for my customer.

 

Key takeaway:

 

It is important to note with any tiered quotation that we calculate the maximumorder quantity at each level. If not, the bulk discount will not save any money and increase the overallcost for the customer.

 

The correct quantity discount formula

 

Many buyers do not recognize there is a better way to determine the best discount on product purchases.

 

Here is the formula: the minimum order on the next highest interval / the unit price in the current interval = the maximum order amount in the current interval.

 

Here is the calculation. It may be easier to understand this way:

 

What is the maximum order quantity in the 100 ~ 999 range?

 

We first determine the minimum cost at the next interval: 1,000 x $3.20 = $3,200.00.

 

Next, we determine the purchase quantity at the 100 ~ 999 range.  This will be the maximum number of products we can buy for $3,200.00.

 

Now we take the $3,200.00 and divide by the unit price at the 100 ~ 999 rage = 780.49.

 

At the 100 ~ 999 interval, the maximum products we can purchase is 781 for $3,200.00.

 

It makes sense to move to the 1,000 product interval.  The purchase amount will go down.

 

781 products at $4.10 ea. = $3,202.10 or 1,000 products at $3.20 ea. = $3,200.00.

 

The savings may look small, but this is just an example.  Larger purchases and purchase costs have much higher savings for the customer.

 

Final thoughts

 

Suppliers set quantity discounts so buyers will spend more on products. It is important for a purchasing agent to focus on the total procurement cost and not the individual cost.

 

As always, Sourcing Nova’s goal is the best products at the best price. This may mean paying more, but the outcomes are much better.