Quantity Discounts

Quantity Discounts

Quantity discounts are price reductions related to the quantities purchased. Quantity discounts may take several forms and may be related to the size of the order being measured in terms of physical units of a particular commodity. This is practicable where the commodities are homogeneous or identical in nature, or where they may be measured in terms of truckloads. However, this method is not possible in case of heterogeneous commodities, which are hard to add in terms of physical units, or truckloads. Drug industry and textile industry offers examples of this type. Here, quantity discounts are based upon the rupee value of the quantity ordered. Rupee becomes a common denominator of value.

Quantity discounts based on physical units become important where the cost of packing is a significant factor and orders of less than standard quantities, say, less than a case of 6 pressure cookers, may involve higher packing charges per cooker. Since the space remains unutilised, the quantity discounts may be employed to induce full-case purchasing. In some cases, sellers may clearly mention that packing charges will be the same whether you purchase a full case or less than a full case. Here also, the buyer may like to go for a full case and in essence avail himself of the quantity discounts. Discounts based on physical units are less likely to be distorted by changes in prices.

In some cases, to prompt large orders, it may he specified that orders up to a certain size will not be entitled to any discount. But beyond this size, the customer would be entitled to a discount for his extra purchases over and above the minimum size. The discount rates may vary with successive slabs of quantities ordered. Alternatively, discount may be allowed on the entire purchases provided they exceed a certain minimum. In some cases, quantity discounts mflY be based on the cumulative purchases made during the particular period, usually at year or a. season, e.g., Diwali discounts may be given on the basis of cumulative purchases made during the Diwali season spread over September to November. This is different from quantity discounts based upon individual lots ordered at a time. These discounts ensure customer loyalty and discourage purchasing from several competitors simultaneously, but the limitation of cumulative discounts is that, they do not tackle the problem of high cost of servicing small orders, because, buyers get no incentive to order for bigger lots and to avoid hand-to-mouth purchasing. Buyers may be inclined to place larger orders towards the end of the discount period to qualify for higher discounts. This may disrupt the production schedule of the manufacture .

The following genital conclusions can be reached:

• Individual order size is a’ better basis than cumulative purchases made during a particular period.

• Discounts based on the quantity of individual commodities ordered have advantages over those based on the total size of mixed commodities ordered.
• Physical units are preferable to rupee value as a measure of order size on which to base quantity discounts.