January 7th, 2022Quantity discount is an important concept when making a high volume purchase on 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 purchase products.
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 bulk price, discount pricing or volume pricing.
The easiest way to understand quantity discount is the more products a business buys, the less they pay per product.
Related: Supplier perception of you, the buyer, as the customer
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 purchase discounts from the supplier are used specifically to encourage high volume purchases. The lower prices offered for larger purchases are often enough to have buyers place a larger order.
2. Quantity purchase 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 purchase discounts. This saves on marketing, development and allows for long-term benefits.
Each supplier struggles to find the “sweet spot”price break for 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 as your sourcing agent 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.
Why does SourcingNova always try to explain the supplier’s intent? This is to help buyers better understand suppliers’ thinking. Then, adopt strategies that are in the interests of both parties. Take a look at the illustration below. The circle on the left represents what is in the supplier’s interest, and the circle on the right represents what is in the buyer’s interest. As a sourcing agent, our job is to do what is best in the interests of both parties.
Related: Learn about Sourcing Nova’s Product Sourcing Services
Quantity discount analysis
The supplier’s price break for quantity discount lowers the buyer’s product costs by buying in larger amounts. However, the buyer needs to do a quantity discount analysis wisely to determine the maximum discount available. Without a proper discount analysis, purchase costs may increase. If you are not sure what Sourcing Nova means, please keep reading.
Within any range of the stepped price list, there is not a simple linear relationship between the buyer’s total purchase cost and the purchase quantity. When the buyer’s purchase quantity exceeds a certain threshold (this threshold is the buyer’s sweet spot), his purchase cost will surge. The buyer may pay more and end up with less product.
Quantity discount example
Most buyers don’t know how to find the most suitable price break for quantity when they get the supplier’s stepped quotation. The purpose of our article is to teach you a magic formula with a simple example.
Here is an example supplier discount quotation: 100~499 $6.5 ea./500~999 $6.0 ea./1000~4999 $5.5 ea./5,000 and up $5 ea.
| Quantity | 1~99 | 100~499 | 500~999 | 1000~4999 | 5,000 and up |
|---|---|---|---|---|---|
| Unit Price | $7.0 | $6.5 | $6.0 | $5.5 | $5.0 |
Our buyer wants 930 pieces. How much does it cost the buyer to purchase 930 items? Is this a wise choice?
Most people will think that the total product price = product unit price multiplied by the quantity, then you may calculate the purchase price as follows:
930 x $6.0 = $5,580.0
Why did I just suspect that this may not be a wise choice? Let’s prove it.
Your Sourcing Nova professional purchasing agent thinks: If I buy 1,000 pieces, the unit cost drops to $5.50 ea., the price is $5,500.00. This saves $80, and I get 70 more products for my customer.
Why can a professional purchasing agent be able to buy more for less? Is there any secret?
Key takeaway:
Within each range of the stepped price list, there is a maximum volume pricing that is in the buyer’s interest, and this threshold is the buyer’s sweet spot. Buyers should make sure that the number of products they buy is below this threshold. If the number of products the buyer wants to buy is above this threshold, it will be more cost-effective to buy the initial number of products in the next range.
It is important to note with any tiered quotation that we calculate the maximum order quantity at each level. If not, the bulk discount will not save any money and increase the overall cost for the customer.
How to find out this maximum purchase volume that is in the buyer’s interest? The answer is our magic formula.
The magic 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 500 ~ 999 range?
We first determine the minimum cost at the next interval: 1,000 x $5.50 = $5,500.00.
Next, we determine the purchase quantity at the 100 ~ 999 range. This will be the maximum number of products we can buy for $5,500.00.
Now we take the $5,500.00 and divide by $6.0, which is the unit price at the 500 ~ 999 rage, and the result is 916.67.
At the 500 ~ 999 interval, the maximum products we can purchase is 916 for $5,500.00. If you need more than 916 products, then you will save more money by buying 1000 pieces. That is to say, the total purchase price of products between 917 -999 will be higher than the purchase price of 1000 pieces.
It makes sense to move to the 1,000 product interval bulk price. The purchase discount becomes more evident.
917 products at $6.0 ea. = $5,502
999 products at $6.0 ea. = $5,994
1,000 products at $5.5 ea. = $5,500
If you buy 999 products, you will pay $494 more than if you buy 1000 products.
The savings may look small, but this is just an example. Larger purchases and purchase costs have much higher savings for the customer.
Related: The Minimum Order Quantity – Learn this to better understand QDA
Final thoughts
Suppliers set quantity discounts so buyers will spend more on products. It is important for buyers to find the maximum purchase volume that is in their own interests within the stepped price list. Only through precise numerical calculations can the final total purchase cost be saved.It is important for a purchasing agent to focus on the total procurement cost and not the individual cost. We have a complete set of resources and processes to help buyers save on purchasing costs.
As always, Sourcing Nova’s goal is to be different than the competition and find the best products at the best price.
