Comparing tiered pricing vs. volume discounts

The product team at your company has created something great, and you're ready to help them put a price tag on all their hard work. If you’re choosing between tiered and volume discount options, you might be wondering about the subtle (and sometimes confusing) differences between these pricing types.

The short answer is that tiered and volume discounts both encourage larger purchases, but these structures work in fundamentally different ways and produce different results for your business. It can be helpful to think of tiered discounts as an endurance-trained tortoise who builds brand loyalty as it nears the finish line, and volume discounts as a hare focused on immediate, if irregular, wins. 

The right pricing strategy can solidify your company's market position, influence customer behavior, and directly impact cash flow. Let’s get into the details so you make the right call for your product or service.

Key takeaways

• Tiered discounts applies discounts when customers meet specific thresholds, but discounts apply only to portions above each threshold. It’s ideal for diverse customer bases and encouraging gradual growth.

• Volume discounts applies discounts to entire purchases once a threshold is reached. It’s simpler, but it can create steep pricing cliffs that can complicate forecasting.

• Tiered volume discounts combines both approaches by applying tiered discounts to an entire purchase. It’s a middle ground that balances simplicity with more predictable revenue.

• Your choice should align with your industry norms, customer buying patterns, and whether you prioritize sustainable growth or immediate revenue maximization

What are tiered discounts?

Tiered discounts is a pricing structure that establishes multiple thresholds, with different savings rates at each level. The key distinction is that savings apply only to the portion of the purchase above each threshold, not to the entire order.

You likely experience a backwards kind of tiered discount every year when you do your taxes. If you land in the 22% tax bracket, only the portion of your income that surpasses the threshold is taxed at 22%. All the income under that threshold is taxed at the lower-bracket rates.

For businesses, a similary graduated discount approach rewards customers of all sizes while enticing customers to buy a little more to achieve more savings — all without pushing average revenue per unit (ARPU) off a cliff the moment a customer hits a single threshold. Tiered discounts reward growth at every level while maintaining profitability on larger purchases.

Let’s look at an example from a fitness company. It sells workout class credits with the following tiers:

• 1 to 5 classes: $20 each

• 6 to 10 classes: $18 each

• 11 to 20 classes: $15 each

• 21+ classes: $12 each

For a customer purchasing 21 classes, the tiered price calculation would be this: (5 classes x $20) + (5 classes x $18) + (10 classes x $15) + (1 class x $12) = $100 + $90 + $150 + $12 = a total of $352

When tiered discounts work best

Tiered discounts excel when you want to cater to a diverse customer base where both large and small customers can see meaningful savings. It's particularly effective for increasing average order volume (AOV) by encouraging regular purchases or gradual increases in spending over time.

This model builds customer loyalty by rewarding growth at every stage. From a business perspective, tiered discounts allow for better profit margin prediction. The small savings offered at each tier mean customers see gradually growing discounts, but the impact on your margins is more controlled and predictable compared to systems where buying just one more unit triggers discounts for all units purchased.

However, tiered discounts are complex and might require either dedicated staff or technology to create and track the systems. Tiered discounts can also potentially confuse customers who will have to understand multiple pricing tiers. 

Despite these challenges, tiered discounts provide more granular control over your pricing strategy.

What are volume discounts?

Volume discounts take a simpler approach, typically with only one threshold. Once customers reach that threshold, the discount is applied to their entire purchase, not just the portion above the threshold.

Using the same fitness company example, if it used a volume discount with a regular price of $20 per class and offered a $8 discount for customers who buy 21 or more classes, the calculation becomes straightforward:

For 21 classes: $12 × 21 = $252

Things can get a little complicated if you apply the discount retroactively — such as to all purchases made during the previous month — but that’s still easy to communicate to customers.

When volume discounts work best

Volume discounts shine in industries where bulk buying is common, such as wholesale or manufacturing. It's the go-to choice when you want a one-time cash infusion, even if that means customers buy less in subsequent months while they work through their inventory. In the fitness class example, this might mean customers purchase large class packages that they use over several months rather than buying smaller packages regularly.

The simplicity of volume discounts make them easy to track and communicate to customers. There's no complex math involved. Customers either hit the threshold and get the discount on everything, or they don't.

However, this simplicity comes with a significant caution: volume pricing can produce a steep cliff when the discount kicks in. A customer buying 20 units pays full price, but buying 21 units might trigger a discount that applies to all 21 units. This cliff effect can make revenue forecasting challenging and may encourage customers to drastically increase a single order — or wait until they can hit the threshold.

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Tiered discounts vs. volume discounts: a side-by-side comparison

Volume vs. tiered discounts example

Let's see how both models perform with the same base price of $20 per class. Remember, our discount structures are:

Actual cost comparison:

At 21 classes, volume discounts provide significantly better savings ($252 versus $352). But tiered discounts give incremental savings for customers of multiple sizes. Volume discounts reward only the biggest customers.

Volume discounts are like using a sledgehammer whereas tiered discounts are more like using a hammer and chisel. The first method delivers powerful results, but it lacks the finesse to handle different customer segments effectively.

Tiered discounts can also increase loyalty and encourage more regular orders because customers know they'll get at least some savings on smaller, regular purchases.

Can you use both tiered and volume discounts together?

If neither the tiered nor volume discounts feel quite right for your product, consider a hybrid approach. Tiered volume discounts establishes multiple tiers but applies the savings at each tier to all units purchased. This approach rounds out some of the rough edges of each method.

Let’s check out another example from the fitness business:

At the same tiers the business used before, our fitness customers arrive at the same total price tag. But the discount progression is gentler and more enticing at each stage. It’s less complex than tiered discounts, but more complex than volume discounts.

Pricing that’s just right

Choosing between tiered and volume discounts isn't just about pricing structures. It’s about aligning your discount strategy with your business goals and customer behavior.

Tiered discounts build long-term relationships through incremental rewards and predictable revenue, making it ideal for diverse customer bases seeking regular growth. Volume discounts maximize immediate revenue and simplify operations, but they create unpredictable patterns and may not serve smaller customers well.

Many businesses will find tiered volume discounts to be a Goldilocks solution that’s not too complex, not too unpredictable, and deliciously enticing for customers of all kinds.

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