Volume Discounts: Should I or Should I Not?

When was the last time you were asked to provide a volume discount? My guess is not too long ago. Did you say “yes” to the request? Do you have a strict policy in general? Do you decide ad hoc, based on your workload that day? Do you feel like there is pressure from the market (i.e., from your colleagues a.k.a. competitors)?

These questions come up time and again in my experience as a pricing consultant for the language services industry. While I can’t give you a yes-or-no answer, I will attempt to provide a set of questions to help you make an informed decision, and perhaps develop a strategy for such situations, which will certainly come up again.

As is always a good idea when tackling any pricing issue, you should go beyond the cost side of the equation. A sound pricing decision takes into account the cost of providing the service, the client’s willingness to pay for it (akin to the value the service creates for them), and the competitive environment in your specific market. Leave any one of these out, and you will get a distorted image, which will likely cause one of two outcomes: you will leave money on the table for no good reason, or you will outprice yourself from what could otherwise be a profitable project.

The Cost

The most trivial approach to pricing in general is cost-based. Your cost is X and you expect a markup of X%. Is this enough to arrive at a good price? Probably not. This is because your resulting price may be higher than your customer’s willingness to pay, or it may be way below that value, neither of which is optimal. You may also not be considering all the relevant cost factors, or you may be considering costs that, in fact, aren’t relevant for your day-to-day pricing decisions (on that, I will write another blog post, as there is more to this than meets the eye).

Now, what happens to your marginal (incremental) cost in a large project? When you start working on a new project, or better yet on a new account, chances are you need to do fairly extensive research to get a grip on the very specific subject matter, any client-specific terminology, their corporate style guide, any project-specific or client-specific technical requirements, etc. Chances are that the first hundred words will take you an hour. Let’s think of this as a set-up cost. As you become familiar with all the different requirements, you pick up speed. The next hundred words will go considerably faster. By the thousandth word, you will possibly know all there is to know to achieve the level of productivity you’re used to. By the ten thousandth word, you may find that the text translates itself. Your marginal cost, the cost of translating the next word (expressed in time for instance, which is arguably your most precious and most scarce input and therefore your most relevant cost), is probably going down considerably as you work on a large project. Should you pass all such savings on to your customer? Not necessarily. But it gives you more maneuvering space.

Do you value the peace of mind of having a certain base load of work for days or weeks to come that you can focus on instead of having to spend time and effort on securing new work every single day? If so, that lowers your relevant cost, too.

On the other hand, if you commit to take on 3,000 words a day for one specific customer for weeks on end, chances are that you will, sooner or later, have to say “no” to another client, to another project, one that may pay more per unit, or one that could involve follow-up work later. Alternatively, you will have to work uncomfortably long hours to accommodate those other clients while you’re still on the high-volume project, too. Either way, there is an opportunity cost (the cost of forgoing something else) associated with your decision to accept a large project, potentially at a lower per-unit rate. Also, if you were to say “no” to the lower-paid (per unit) large project, do you risk losing any more lucrative (per unit) smaller projects for the same account? That is an opportunity cost that you absolutely must factor in, too.

The Customer

Knowing your true, relevant cost, as discussed above, tells you how LOW you can possibly go without making a loss. But just how HIGH can you go without losing the potential project right away? The upper threshold is actually defined very clearly by the customer’s willingness to pay (WTP). The problem? You only have limited means to find out what their WTP is. They have absolutely no incentive to tell you, at least not truthfully. Your knowledge of their line of business, your knowledge of the specific customer, or your negotiation skills may help you elicit some idea of the value your service delivers to them. This value is a decent proxy for their WTP. That is the true economic worth of your service, and the very maximum they will ever consider paying for it.

Now, is this WTP, taken per unit, the same for a 100-word press release about a new product of theirs as it is for a 100,000-word maintenance manual for the same product? Very likely not. That presents a hard limit on how much they will ever be willing to award the large project for. Could it be that your true cost per unit will end up being higher than the value of the service to them per unit? Absolutely. In that case, you cannot afford to serve them.

The Competition

From the two sections above, you have some idea of how low you can go (your true cost) and what the absolute maximum is that you can get away with (your customer’s willingness to pay). Your optimal price necessarily lies somewhere between these two limits. But where exactly? This can be a pretty wide range.

Unless yours is a very rare language pair or a truly unique area of specialization, you likely face a good amount of competition in this highly fragmented language services market. Is somebody in your specific market (delimited by language combination, subject matter, and possibly also geography) fighting for market share at the expense of immediate profit? Is somebody in your market willing to unleash a price war to eventually drive you and others out of business? Do you have competitors whose relevant cost is considerably lower than yours (because they choose to do business from a lower-cost location, for instance)? If the answer to any of these questions is “yes,” then you probably find yourself in fierce competition.

On the other hand, are you able to position yourself as the go-to provider through some kind of differentiation? Do you already have a relationship with the requester and are you already their preferred vendor? Then you may be able to shield yourself from some of the adverse effects of competition when quoting on a large project.

The Decision is Yours to Make

Have I given you an answer as to how much to charge for a large project, or an answer as to whether or not you should provide a volume discount? Most certainly not. I am not even allowed to, according to ATA’s antitrust policy, which closely mirrors the law in the country where this is published.

Have I given you a structured framework to think about volume discount and to arrive at a decision that makes sense in your particular situation? I humbly hope so.

Do you have any other pressing questions about pricing? Email me, or comment below, and I may address your issue in a future post.

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About the Author

Daniel Sebesta has been a linguist since 2003. He holds an MBA degree with a specialization in pricing and strategy and is a Certified Pricing Professional and a member of the Professional Pricing Society. In addition to his translation work, he consults with companies on pricing, profitability, and adopting language technology. He is a former administrator of ATA’s Language Technology Division and a former chair of ATA’s Divisions Committee.