Tiered pricing and volume incentive programmes are both excellent ways to spur sales and encourage buyers to order larger quantities of products. Each pricing strategy offers your customers a financial incentive to purchase more – the more they buy, the better price they receive on their orders.
However, though the terms are often used interchangeably, there are key differences between a tiered pricing structure and a volume incentive programme. This article will examine the differences between the two and consider the benefits of each.
What Is a Volume Incentive Programme?
A volume incentive rebate programme is designed to offer buyers the opportunity to earn rebates based on purchase volume.
The incentives offered are usually arranged in order of incremental benefit to the customer. For example, let’s say you sell a product with a price per unit of £100. Buyers who order:
100+ units receive a £5.00 rebate per unit
500+ units receive a £7.50 rebate per unit
1,000+ units receive a £10.00 rebate per unit
So, using these figures, if the buyer orders a total of 650 units over the course of the year, they will earn a rebate of £7.50 on each of them, equating to a £4,875 rebate at the end of it.
Importantly, volume incentive rebates are paid back to the buyer retrospectively – that is, they are issued after the initial payment of goods and only once the terms of the agreement have been met. In this way, they drive sales growth without suppliers having to resort to price reductions and upfront discounts. With volume rebates, the invoice price remains fixed and buyers must pay in full. The actual price varies with volume, however, with the difference granted as a rebate.
The Benefits of a Volume Incentive Programme
Many organisations offer volume pricing incentives due to the fact they are a great way to encourage customers to buy more – but there are many further advantages.
A volume incentive programme helps you compete in the market – offering volume rebates to customers makes you an attractive organisation to do business with, especially to those looking to make large purchases.
A volume incentive programme also encourages customer retention. Volume incentive rebates lock buyers in for the long-term. Because the buyer only qualifies for a rebate once they’ve crossed the volume threshold, the programme incentivises them to keep purchasing until they do. In this way, volume rebates also promote loyalty, as they protect you, as a supplier, from the risk of customers engaging with competitors about similar products during the course of a deal.
A further benefit is that volume incentive programmes protect sellers from buyer over-promising. When relying on upfront discounts to drive volume-based sales, there’s nothing to stop a buyer from promising to order 1,000 or more units over a twelve-month period to get a discounted price – but in the end only ordering 100 or less.
Volume incentive programmes can also be tailored to encourage different types of buyer behaviour – for example, increase volume across a wider range of products. This is where, for instance, a product mix rebate would come in handy – where the buyer earns a rebate on their regular order of one product on the condition they order a new one (at full price) as well.
There are, in fact, many other types of rebate conditions that can be tied to volume-based rebate agreements. For instance, the growth rebate, where growth is essentially a condition attached to a volume rebate. Here, rebates are earned when buyers meet certain growth targets – such as when their spend has grown by a certain value or percentage above a specified baseline (2% growth in spend over the previous year qualifies for a £10,000 rebate, for example).
Understanding the different ways in which volume incentive programmes can be structured and how they can be used strategically to drive different types of buyer behaviour will help improve and inform your pricing and negotiation strategies when thrashing out deals.
Discover more in our free guide ’10 Tips for Your Rebate Pricing Strategy’ which you can download by clicking the button below.
What Is Tiered Pricing?
Tiered pricing works differently to a volume incentive programme.
Rebates are not involved with tiered pricing – instead, the customer pays a different upfront price per unit within a certain volume range or tier. Typically, the price paid per unit decreases as additional purchases are made and the customer moves through the tiers.
For example, to sell our £100 product using tiered pricing, the prices actually paid along subsequent tiers could be as follows:
First 1-100 units = £100 per unit (Tier 1)
Next 101-500 units = £95 per unit (Tier 2)
Next 501-1,000 units = £92.50 per unit (Tier 3)
Orders above 1,000 units = £90 per unit (Tier 4)
So, using the above figures, let’s say our customer again buys 650 units over the course of the year. The first 100 units cost £100 each (Tier 1). The next 400 cost £95 each (Tier 2), and the final 150 cost £92.50 each (Tier 3) – so the customer pays a total of £61,875.
The Benefits of Tiered Pricing
You’ll notice that the tiered pricing figure is higher than what the customer pays in our volume incentive rebate model above – in which, once the £4,875 rebate is issued, the customer effectively pays £60,125 for the 650 units.
The difference is £1,750 – which is a substantial sum from both the buyer’s and seller’s perspective.
This can be seen as one key advantage of the tiered pricing model, as it can help you earn a higher margin. This is because customers pay the full price for X number of units in Tier 1, then the full Tier 2 price and so on – as opposed to effectively paying a lower price for all units as customers progress through the subsequent tiers (as is the case with the basic volume incentive model).
Like volume incentive programmes, tiered pricing also helps to protect you, as the seller, from losing margin on low-volume orders, while providing an incentive to customers to buy more volume.
Optimise Your Pricing Strategy with Rebate Management Software
Both volume incentive programmes and tiered pricing strategies have their advantages. While, on the surface at least, tiered pricing appears to unlock the greatest revenue and margin potential, it must be noted that rebate programmes are much more flexible.
Rules and conditions are easily adjustable in rebate programmes to not only increase revenue and protect margins but encourage and reward various other types of buyer behaviour as well. This is especially true for organisations that use rebate management software – an advanced tool to achieve pricing perfection across multiple product lines for individual customers.
Indeed, no matter what type of pricing strategy you use to compete in the market and retain customers – tiered pricing, volume incentives, or any other rebate pricing structure – a robust rebate management software solution is nothing short of essential.
All pricing strategies are complex – and all sales must be scrupulously tracked against each pricing package in deployment to ensure the right price is set and the right rebates paid to the right customers.
e-bate’s intuitive and intelligent rebate management software allows you to build personalised pricing schemes and rebate incentive programmes for individual customers and across individual product lines. With a built-in calculation engine, all sales made against your agreements are tracked in real-time, while our advanced deal modelling features allow you to analyse and determine the profitability of all pricing strategies before putting them into action.
Talk to our experts at e-bate today to learn more about how implementing a rebate management system will help you optimise your volume incentive programmes and tiered pricing strategies. You can also book a demo of our intelligent rebate management solution.