Pumping up the volume

Aug 01, 1998 9:30 PM  By

The practice of giving volume discounts, in which catalogers offer price breaks to customers for placing large-volume orders, is a popular one among a majority of the business-to-business participants in the 1998 Catalog Age Benchmark Report on Marketing (see February issue). Sixty-eight percent of respondents said they offer volume discounts regularly; just 9% said they’d tried volume discounts but failed with them, and less than one-quarter-23%-never tried them. And as you might expect, volume pricing was most popular among b-to-b catalogers with sales of $10 million and up, 81% of which said they offer such discounts regularly, according to our report.

But b-to-b catalogers’ standards for establishing volume discount programs vary. As with most other facets of the diverse b-to-b catalog market, no two companies offer the same discounts for the same minimum order sizes. “There is no typical percentage of volume discount, because every industry in b-to-b is unique unto itself,” says catalog consultant Katie Muldoon, president of Sugarloaf Key, FL-based Muldoon & Baer. “You can’t have the same discount structure, because there are big margin differences for different catalogers.”

Many catalogers that process volume orders give their phone or field sales reps the flexibility to negotiate with each customer individually, basing prices on order sizes and customers’ company sizes, without publishing volume prices in their catalogs. Others set specific order-volume and price-break levels-10% off any order of at least 1,000 units, for example-and include those prices in the catalog. Still other mailers give their sales reps flexibility to negotiate prices for some orders while setting price or volume levels on other orders. And in cases of especially large orders, sales reps often must negotiate a deal with the product vendors before quoting customers a price.

Setting a price Kansas City, MO-based Hallmark Business Expressions (HBE), the corporate catalog arm of the card manufacturing giant, lists prices such as $2.25 a card for a minimum order of 50 cards and $0.90 per card for 2,500 or more cards ordered from its catalog. But spokeswoman Kathy Mishek points out that when customers order custom-designed cards in large volumes, they are referred to HBE’s business development consultants, who negotiate prices based on such factors as the labor involved in creating the cards, the cost of the paper the customers request, and of course, the number of cards ordered.

Other b-to-b catalogers have even more structured volume pricing schemes. Take $150 million car parts cataloger J.C. Whitney, whose b-to-b sales have grown to $7.5 million in the one year it has pursued the business market. Whitney bases its volume pricing on “whether we’re in a competitive bid, whether it’s a direct-from-factory ship or if we stock it, and whether the customer needs the merchandise all at once or in installments,” says vice president of marketing Ed Bjorncrantz, who won’t specify pricing or volume parameters.

Then in the case of Thief River Falls, MN-based Digi-Key, the $201 million industrial electronics cataloger considers offering volume discounts if the total sale exceeds $10,000. Beyond that prerequisite, the company gives its sales reps considerable flexibility in determining the levels of volume discounts, according to Digi-Key president/ chief operating officer Mark Larson.

Because they’re often given the latitute to set prices or are required to negotiate with vendors, sales reps who work with volume customers need special training. Until only recently, Digi-Key’s infrastructure for servicing volume-order customers “was inadequate,” Larson admits, because its sales reps didn’t know how to arrange for volume orders from Digi-Key’s manufacturers, and their work stations weren’t set up to process these types of orders.

So earlier this year, in anticipation of increased volume business, Digi-Key established a volume business division, plucking 10 of its most highly trained sales reps from its regular telemarketing department of 200 people and assigning them to take only volume phone orders.

Digi-Key’s volume-business sales agents often act as middlemen between customers and manufacturers because the cataloger-which offers some 75,000 SKUs in its catalog-usually doesn’t stock large enough quantities of the items ordered in volume. A customer may need 150,000 pieces of an electromechanical product over a three-week period, for instance, whereas Digi-Key might have only 20,000-30,000 units in stock, Larson says. So Digi-Key’s volume sales agents not only have to make sure the manufacturers have enough stock available to drop-ship, but they also negotiate appropriate volume prices with their manufacturers before offering discounts. The time it takes a sales agent to establish availability and pricing varies, depending on the products ordered and the vendors with whom the salespeople have to negotiate.

Risky business In most cases, catalogers and other distributors have their manufacturers fulfill customer volume orders over a period of time, rather than in one fell swoop. For large orders needed over a months-long engineering production process, for example, the customer might require 1,000 units of a particular product each week. As a result, mailers often accept credit terms or partial payment plans.

These large orders can be risky, says equity analyst Robert Damron, of Milwaukee-based investment firm Cleary Gull Reiland & McDevitt. If customers cancel the orders halfway through or fail to make all their payments, the catalogers run the risk of owning excess inventory.

But selling merchandise in larger volumes at a discount doesn’t seem to pose a risk for $1.28 billion computer cataloger Computer Discount Warehouse (CDW), says president Greg Zeman. Volume orders in the computer market are generally smaller than those in segments such as industrial supplies, he says. While a business might require from CDW several dozen modems or CD-ROM drives in an office, it’s not going to require tens or hundreds of thousands of them, as an engineer may require of Digi-Key’s cable connectors.

Still, CDW faces its own set of complications when setting volume prices, given that profit margins are as low as they’ve ever been in the computer market. In the past, the cataloger advertised roughly 1,200 of its 28,000 products in its print catalog and magazine ads. Today, however, CDW advertises all 28,000 SKUs on its Website. While only the base prices, not volume prices, are listed for the products, the retail prices give prospective customers a starting point from which to bargain. As a result, CDW’s sales reps don’t have as much flexibility to negotiate volume prices as they did when there was no advertised price for many items. But at least the volume pricing today “is more consistent,” Zeman says.