Hidden Advantages of Pricing Tiers

Let’s dive into a pricing method that is quite uncommon in some markets while totally mainstream in others. First, what is it and how to call it?

  • Volume Discounts
  • Buy More Pay Less
  • Bulk Pricing
  • Tiered Pricing
  • Buy X Get 1 For Free

Many names for the same core idea. We are giving a discount to the customers but only under one condition: If they buy certain amount of the item. “Buy 3 and get 1 for free”, which is equal to 25% discount on the base price. Sure the mechanics can vary in the details. You might have more than one discounted tier. It might be set so that the discount only applies on the 2nd / 3rd / 4th item and above. The only limit of your pricing creativity might be the customer’s understanding of what they are actually paying in the end.

 

Bulk discounts in FMCG

You can find various mechanics of volume discounts anywhere from software products to the energy sector. As we focus on FMCG retail and wholesale, let’s discuss more how exactly can bulk pricing strategies work in these sectors. There is always the age-old question: Which pricing strategy to choose? High-Low or EDLP? What if we can have both?

The goal is to effectively provide a lower price to the more price-sensitive buyers and keep a higher margin for insensitive buyers. The high-low strategy actually aims for the same. The price-sensitive buyers wait for the promotion while the others buy the product when they need it, which will more likely be in regular sale as the promo might last for one week per month or so. Now let’s think of who are the price-sensitive buyers. They might be families doing big weekend shopping. They might be resellers who take advantage of the good deal. Quite often they are people who buy more of the product, which makes the price more important to them. Now quite logically, it might be the best to set the price based on the amount the customer is buying. The price-sensitive shoppers can get a good deal at any time and we can also effectively motivate all groups to buy more.

 

Why do it

If done right, there are some obvious advantages as well as more hidden ones:

🟢 The Happy Customer

As we have described above, the price-sensitive customers get their value at any time. Knowing that might actually increase their loyalty too. With the right prices and right communication, the customer satisfaction will likely grow.

🟢 The Margin

When set right the tiered pricing approach can be a win-win for both revenue and margin. Compared to high-low strategy we can push customers to buy more which increases the revenue. At the same time we are not loosing margin on the insensitive buyers that just grab one item and go not even noticing that it happens to be in a promotion.

🟢 The Way Out of High-Low

Many retailers are locked in the endless loop of promotions. They are costly not only because of the low margins, but also because of leaflet printing and distribution. However cutting them is not a good idea as a general perception of high prices can emerge when people stop seeing the promos everywhere.

🟢 The Supply Chain

This is a big one. High-low strategy creates ripple effects through the whole supply chain since the demand dramatically increases and falls over time. This is typically a constant source of stock-outs and over-stocks, which have huge negative impacts by themselves.

🟢 The Competitive Advantage

It is not easy to execute an effective and sustainable bulk pricing strategy. Your competitors won’t be able to quickly to the same, so you might be able to build a competitive market advantage.

 

What to be careful about

Now I’m sure you can already feel how bulk prices can be an amazing tool in retail, but let’s be honest and go through some potential disadvantages and how to avoid them.

🟠 The Confusion

Communicating the price of a product in physical stores can be challenging already. Besides the price itself there might be many more figures such as product size, code, price per unit. Now with tiers we are literally adding an extra dimension of complexity. Customers can get easily confused and repelled from purchase unless the visual communication is very clear and easy to understand.

🟠 The Applicability

Sure not all products are suitable for bulk pricing. In B2C retail there are simply products where rarely more than 1 item is sold in a single basket and no reasonable discount will change that. For example speciality spices or more expensive bottles of whisky. Even more often there might be restrictions from the supplier on what strategy to set on their products. However, suppliers typically change their mind when seeing the benefits.

🟠 The Price Perception

This is probably the most dangerous trap one could fall into when introducing bulk prices. Even if the prices are actually competitive, even possibly cheap compared to the market, they might not be perceived that way. While prices are inherently numbers, people are not machines. The same price in the same store can be perceived as high or low under different circumstances. Customers might be used to buy their favorite product in promotion, having the good deal associated with a colored price tag. When introducing bulk prices it is important to educate and create the samo feeling of a good value when buying in discounted tiers.

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