Quantity Discount: Definition, How It Works, Pros & Cons

What is a quantity discount?

A quantity discount is a pricing incentive that lowers the cost per unit when a buyer purchases larger quantities. Sellers use quantity discounts to encourage bulk purchases, move inventory faster, and increase revenue per transaction. Common consumer examples include buy-one-get-one offers and “buy two, get one free” promotions.

How it works

• Sellers set price tiers or “steps” where per-unit price decreases at higher quantities.
  Example: T-shirts might cost $7.50 each for orders under 48, $7.25 for 49–72, and $7.00 for 73+.
• Discounts can require full payment/delivery by a date or allow payments and deliveries to be spread over time.
• Benefits to the seller include higher units per transaction (UPT) and potentially lower per-unit costs from economies of scale (bulk purchasing, single-shipment savings).

Examples

• Tiered pricing: Coats at $20 each, five for $90, or 10 for $160.
• Simple numeric example: If a product normally costs $5 each, selling 100 units for $450 makes the per-unit cost $4.50 (a 10% discount).

Purpose

The primary purpose is to sell more product. Lower per-unit prices entice buyers to purchase in greater quantities, which can be useful for consumers who consistently need the product or businesses that use the item as a raw material.

How to calculate a quantity discount

1. Divide the total price at a given quantity by the number of units to get per-unit cost.
2. Example: 100 items for $300 → $300 / 100 = $3 per unit.
3. Compare that per-unit cost to the single-item price or other tiers to determine the discount percentage.
4. Discount % = (Single-unit price − Discounted per-unit price) / Single-unit price × 100

Advantages

• Increases total sales volume and units per transaction (UPT).
• Enables economies of scale: lower per-unit costs from bulk supplier discounts and combined shipping/handling.
• Helps reduce inventory quickly, useful for seasonal or soon-to-be-obsolete products.

Disadvantages

• Reduces marginal profit per unit unless economies of scale offset the discount.
• Example: If cost to make a coat is $10 and retail is $20, profit per coat is $10. A $2 discount per coat reduces profit to $8; a $4 discount reduces it to $6 unless production or supply costs fall.
• Risk of eroding margins if discounts become standard expectation among buyers.

Quantity discount vs. linear pricing

• Quantity discounting: Per-unit price falls with higher quantities, incentivizing bulk purchases and enabling economies of scale.
• Linear pricing: Same per-unit price regardless of quantity, which simplifies margin management but offers no incentive to buy more.
  Example of linear pricing: $20 per T-shirt whether buying one or 10; marginal profit stays constant.

Key takeaways

• Quantity discounts lower per-unit cost for buyers who purchase in bulk and encourage larger orders.
• They can increase sales volume and reduce seller costs through economies of scale, but they shrink per-unit margins unless offset by cost savings.
• Businesses should weigh the potential for higher volume against the impact on marginal profit and decide between tiered discounts and linear pricing based on strategy and cost structure.

Bottom line

Quantity discounts are a strategic tool to boost bulk sales and reduce inventory, beneficial when buyers need recurring supplies or sellers can realize cost savings at scale. Use them carefully to balance increased volume with maintaining healthy margins.