Calculating volume discounts for software

discount.jpgIf people buy your software in bulk they expect to get a discount. But how much of a discount should you give them? A simple formula I have seen used is:

discounted price = unit price * n^f

Where n is the total number of units purchased and f is a scaling factor between 0 and 1. So, for example, if my unit price is 24.95 (pounds, dollars etc) and f is 0.8, the discounted price for 10 units is = 24.95 * 10^0.8 = 157.42, which you can then round to a more aesthetically appealing number.

This is a little over-simplistic, as it doesn’t take account of the cost to you of each unit (for example the duplication and postage cost of CDs and the cost of payment processing). We can get around this by breaking the price into a fixed cost and a margin and only applying the discount to the margin. Below is a link to a simple Excel spreadsheet that does this for you. You can change any of the values in the orange fields. f seems to give sensible results in the range 0.75 to 0.9.

discount_spreadsheet1.png

discount spreadsheet (29kb, Excel 97-2003 format)

This spreadsheet can be useful to give you a starting point, but you also need to consider what the customer is prepared to pay. You maximise your profit by giving the buyer the minimum discount that is required to make the sale. For example, a reseller is out to make a profit and will probably expect a bigger discount on the same number of units than a large company buying in bulk for their end users. When in doubt, reduce the discount. You can always increase it a bit later if they don’t buy.

5 thoughts on “Calculating volume discounts for software

  1. stephane Grenier

    Hi Andy,

    One thing I would add is the cost of support when you calculate discounting. In other words, include your average support cost per unit to the calculation. For some companies this might be minimal, but for others it can quickly become significant.

    Great article BTW!

  2. Andy Brice Post author

    Joannes,

    My current approach is not to publish discounts, but to ask them to contact me for a discount if they want to buy 5+ licences. I will then quote them a discount roughly in line with my formula, but tailored to what they can afford/what the software is worth to them, i.e. more generous for a charity.

  3. anthonyx26

    While this thread is a little old, I thought I’d contribute my work on the original Excel software discount pricing sheet (as it served me for inspiration). I’ve been trying to nail down a good strategy for software pricing and I think I found one in the following Excel sheet:

    http://71.184.222.31/public/SoftwareAndSupportVolumeAndPrepayDiscounts.xlsx

    [format Excel 2007]

    I tried to shape it so that it takes into account volume discounts as well as maintenance/support (with pre/post paid pricing options).

    While I’m sure it’s not perfect, it seems like it offers a pretty good way to calculate out software costs.

    Thoughts?

    – anthonyx26

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