Volume Discount

[Techy]

Hi,

I run an engineering company and a new large client has asked for volume discount on total yearly sales, which I haven't encountered before despite dealing with other larger companies.

We only price in 10% profit on jobs, however they are asking us to define what % discount we would supply for the following (8 x bands):-
- up to £50k
- £50k - £100k
- £100k - £200k
- £200k - £400k
- £400k - £700k
- £700k - £1m
- £1m - £1.5m
- +£1.5

If we offered them 1% discount for the first band, 2% for the second, 3% for the third etc... we would only get 2% profit on the last band (not that I envisage we would reach this level however).

Any thoughts would be appreciated, as want to show willing.

 

[cjd]

Your offer seems a little linear - not related to your costs. You should only discount to levels that make sense with your own costs, otherwise you kill your own profit.

Also be very wary of people who want a discount at the higher level from day one but never achieve the higher level. Only give discounts after the levels have been achieved, not before.

(We get a lot of calls along these lines: "I want 50 telephones, what discount can I have? Then, when given the rate, we get "Ok, I'll take two at that rate to be sure they work properly and then order the rest". No, sorry - normal rate on the first two, discount given on the next 48 ;-)

 

[davidshaw89]

The problem with this is that when they exceed the final band, they will be expecting you to drop your percentage lower again.

This might force you to cut expenses, and in turn produce inferior products which would affect your business as a whole, with your customers paying full price being disadvantaged as well. And if this happens, your customers will gradually walk away as the quality decreases.

I'm not sure how I would approach this one personally. I despise offering discounts so I would probably just add value to the offering rather than decreasing the price.

 

[Leo-InstallingIT]

Hi

I am not sure exactly what area of engineering you are in, but if it is anything large scale surely those thresholds aren't actually that large?

I would be tempted to say that you offer a discount after about £400K, of a percent or so. And maybe increase it slightly for the bands higher than that. I am by no means an expert in your trade, I am just thinking it may help in making you look slightly bigger than you are if your discount threshold is quiet high.

I know we all want to be nice to new client, but sometime you have to stand your ground (especially if they are large) as they may try and take you for a ride.

I hope this helps,

Many Thanks

Leo

 

[Techy]

Many thx for the replies, all greatly appreciated.

We are involved in design so the risk is relatively low, unless we mess up which I ensure doesn't happen.

The issue is in how much discount can we retrospectively provide if they give us plenty of work.

I appreciate my offer is linear but not sure what else to offer, as can't exceed 10% otherwise all margined profits are wiped.

I would imagine that we will operate in the £100 - £200k or £200 - £400k bands to start with, so 2% - 4% could be a starter.

Quality will not be comprimised, just want to establish what is reasonable.

The going rate for major (£m) construction work is a 7.5% discount but we are only mainly involved in the design stage, whch is only 5 - 10% of the overall project value, so this is relevant.

I could tell them 0% till BLAH T/O but this doesn't show any goodwill, which I am always keen to do.

 

[Barnie]

do your costs come down with major orders or are your costs stable

i would also ask them to forecast the next 12month sales with your selves


tbh id go on a flat rate, say after 500k they would get a 2.5% ongoing discount on all further work providing 500k's worth of sales per annum or rolling 12 month period

something like that

 

[graemepirie]

Just one thing to bear in mind - any decent buyer should be asking their suppliers for discounts. It doesn't mean you have to bend over backwards to give them it. It doesn't even mean they expect a discount, often it's just a case of "don't ask = don't get".

Just make sure your overall package to them (product, quality, delivery and price) gives them the reason to buy from you rather than your competitors.

Never give discounts that you're not happy with.

 

[Mister B]

There are a few ways of looking at this, but initially speaking, without knowing your business, I would be inclined to bear in mind the following:

1. There is no point in offering a discount on the first band. List price is list price and why should it even be discounted?
2. The breaks are not too far apart, IMHO, close enough for people to work a little harder to get to the next discount band.
3. How much extra discount can you get from your suppliers for added volume? As others have said, you need to know this so that you can factor it into your costings.
4. I would disagree with the point that industry average discount of 7.5% is relevant. The final price is relevant, not the amount of discount. Otherwise, why not put your prices up by 7.5% in order to offer a 7.5% discount?
5. Try not to give the discount as a line discount-try and tie it in with prompt payment terms and if possible, as a retrospective discount.

Mister B

 

[Page]

Remember you don't have to offer a discount at all.

it is business it is whatever works for both parties.

Don't fall into the turnover without profit trap.

 

[Techy]

Thx again,

Appreciate all feedback.

Went with my initial thoughts after discussion with a few associates.

Main logic is we don't have any suppliers as everything is done in-house and we generally make around 30% pre-tax profits, so giving away a few % profit to get another £300k odds of increased workload per year seems a good move especially in todays climate.

 

[Gord]

Just one thing to bear in mind - any decent buyer should be asking their suppliers for discounts. It doesn't mean you have to bend over backwards to give them it. It doesn't even mean they expect a discount, often it's just a case of "don't ask = don't get".

I think this is a salient point, and since it's a new customer ,I think that I would be trying to understand my customer better.
The purchasing department will be tasked and judged on driving cost prices down. Did you deal with this department when you secured the business , or did you sell to the marketing/ engineering departments ? If so, sound out the individuals with whom you secured the business.

I'm guessing here but if you are a "design engineering" company , does this mean you are manufacturing prototypes & "one-off's" ?
If so , you can argue that volume discounts are a legitimate mechanism related to the economies of scale, not to spend.
ie: if you buy 1 it will cost £100 , if you but 1000 they will be £10 each.
Volume discounts are not economically significant within the bespoke environment.

 

[movietub]

We sell at very low margins and are this year on track to break the £1m turnover mark. In part lowering prices as volume increased has helped us out.

The problem is how far can you take this approach? The reason so many huge companies are folding is because they increased volume, built up a massive infrastructure to cope and then reduced margins to remain competitive. Ultimately its not uncommon for the GP of a large organisation to be less than 5%. The problem comes if demand drops by a similar tiny % and all of a sudden your infrastructure costs you more than you get in revenue.

This is why in the current recession, despite the economy only falling by a few % overall, big companies can get hit hard. They only ever made money on the last few % in the first place.

In your example lets say you get to £1m pa spend from this customer, so essentially you are delivering £1m of product for 2% margin.

Would you need to hire extra staff/space/equipment to deliver that volume? And then if they suddenly stop buying could you afford the time required to gently downsize or would the immediate overheads overstretch you to breaking point?

If there was a danger of the above hapening it would be more sensible to discount on the rate you have suggested but set a maximum discount level. I spend about £400k with our main supplier and we have now reached a point where no more discount will be given to us. Quite simply w have spoken at length (director to director) and its clear that there was no more sensible room for movement without potentially creating a weak spot in the supply chain!

If they want to talk about spending £1m then they must need reliability to actually deliver - for that reason a sensible reasoned response should pacify them.