What is a Pricing Waterfall: A Complete Overview

The business world is becoming increasingly competitive, not to mention complex. From the pandemic through to regional conflicts and the potential recession now at our doorstep, more than ever business owners are looking to finding additional ways to be price competitive. However, it’s not always as easy as simply knowing the market and your competitors. To make the most of your earning opportunities, setting the right price for your products is the key. In these uncertain times, the pressure to lower your prices is high. But is slashing prices the only way to stay afloat? Find out in this article, ‘What is a Pricing Waterfall & Why Do I Need One?’ how an accurate price waterfall can help you visualize and identify your profit points and seal margin leakage before your profits slip away. 

At Pricefx, since 2011 we have assisted companies across all ranges of industries to dramatically improve profitability and market share by defining optimal prices and pricing strategies utilizing the visual insights of the pricing waterfall. Using price waterfall analyses, large-scale enterprise businesses just like yours can leverage your existing sales transaction data to grow your bottom-line profitability by identifying margin improvement opportunities.  

A ‘B2B or B2C?’ PRICING WATERFALL DISCLAIMER 

 

Pricing Waterfalls will always look different in every business, depending on your processes, on your products and on the structure of your business. 

 

However, for most companies involved in the B2B space, the pricing waterfall has a similar look and comprise similar elements. 

 

The availability of data in B2C is wide for everyone, which means that pricing approaches/strategies can be more prescriptive, accurate and complex. The dynamic in the marketplace is huge, leading to a need for quick reaction to its changes. This is a key success factor and a big challenge. 

 

A pricing waterfall cannot be built as easily as in B2B, because of the different approaches in each B2C environment. It is another point of view. 

 

Instead of going for a lack of complexity, we’d rather use differences in the business environments and the diversity of pricing strategies approaches. 

 

Consequently, for the purposes of this article we will concentrate on how the pricing waterfall works and benefits B2B organizations. 

 

Let’s dive straight into it, by examining what a pricing waterfall is, and what it does. We’ll continue through the cascading journey of the pricing waterfall to look at the different steps before examining why it is a valuable tool to realizing your unique business outcomes through its powerful pricing insights. 

What Is a Pricing Waterfall and What Does it Do? 

 A pricing waterfall is a visual analysis method used by businesses to easily see and find the hidden costs and money leakages at every price level. Pricing waterfalls help companies to both identify how much of real profit and revenue is being gained from each-and-every transaction, in addition to sealing margin leakage and making them airtight by identifying areas where pricing is ineffective. 

Before the price is printed on your customer’s invoice, it goes through an entire range of transformations at various price levels.  

The pricing waterfall is simply an effective means of visualizing the steps involved and for easy examinations of the entire process of what makes up the price transformations. 

Referencing the image directly above, many companies stop measuring pricing at the invoice price (list price minus assorted discount types). For example, if something is priced at $100 and the discounts applied amounted to 20%, the company measures their price realization at $80. 

However, there are many other value-added features that have an impact on the price, such as rebates, warranty, free delivery, payment terms, technical support – the list goes on and on – and for every company and product it may be quite different.  

Depending on your business model, the pocket price could be as much as 20%-30% less than the total of the invoice. The impact on profitability can be a huge one and can drive many companies into a situation of having unprofitable or only marginally profitable customers. 

The price waterfall brings easy visibility to what are the factors affecting the pocket price and opens the possibility of knowing exactly what pricing issue (such as eliminating, decreasing, or transforming discounts, rethinking free delivery etc.) that your company needs to address. 

Benefits of a Pricing Waterfall 

Implementing a pricing waterfall requires time, energy, resources, and financial investment. With that being the case, it’s good news that for most large-scale B2B companies, the benefits of using a pricing waterfall are enormous, including; 

Identifying Market Opportunities 

 If your products are underperforming in a particular country, district or market, the price waterfall can help inform you where you should improve and transform the pricing of your product. 

Improving Customer Communication 

 The price waterfall is a reliable way to find out if you should upgrade your customer communication and emphasize things like the value of your product such as dropping discounts for example to add to the value perception of your products. 

Analyzing the Impact of Both On- and Off-Invoice Discounts 

Using a price waterfall helps you identify if both on- and off-invoice discounts are relevant and financially justified. Reductions in either category will have a direct and immediate positive impact on your organization’s bottom line. 

Total Price Transparency 

With a pricing waterfall, the implicit and explicit elements of the real product costs have nowhere to hide and are visible for all to see from local and global adjustments, currency adjustments, underperforming quantity discounts etc. 

Use the pricing waterfall to understand internal selling and service costs that affect profitability. 

Profit Maximization 

Anyone out there who does not find the benefit of extra profit an attractive and compelling one? Use your pricing waterfall chart to pinpoint margin leakage across your customers, products, and transactions. By easily identifying the margin gaps to plug, you can achieve an improved price for your products in every single transaction. 

Value-Based Negotiation 

A powerful technique used to help your pricing waterfall is to break up the price waterfall into smaller sections up to the “pocket” price level. This allows for your pricing to create multiple negotiating levers to achieve the best price and give your salespeople wider price corridors. 

Examples include off-invoice discounts, in exchange for electronic payments received before due date or volume discounts achieved before the time period is up etc. 

This results in perceived ‘fair exchange’ creating a ‘win-win’ value scenario, not a lopsided commercial relationship favoring either the seller or the buyer. 

What Type of Companies Can Benefit from a Pricing Waterfall? 

Companies that will benefit most from the use of a Pricing Waterfall will be those seeking to:

• Make dramatic improvements to their profitability and market share by defining improved prices and pricing strategies. 
• Unlock extra revenue and margin that can be generated by ‘quick wins’ repairing the most glaring cases of price misalignment and leakages.  
• Increase operational efficiencies 

What Type of Companies MIGHT NOT Benefit from a Pricing Waterfall? 

Smaller companies yet to reach maximum pricing maturity levels might not benefit from a pricing waterfall.  

For example, if your company does not have experienced IT or pricing teams, you may need to ask yourself an honest question if your organization has the budget and resources that is required to incorporate the technology in your workplace. 

If your organization is not ready nor has the available resources at hand to implement pricing software and a pricing waterfall, learn about how a System Integrator Partner can help you to get it done in the article below:

Key Elements of Your Pricing Waterfall 

 As mentioned above, every company’s pricing waterfall may look different due to the key elements that maybe or may not be involved in your pricing process.  

For example, one company may work in multiple countries and currencies meaning there may be several local and currency adjustments on their waterfall. However, another organization might specialize in one country only and not have those elements on their pricing waterfall. 

Below are several common elements that appear on most pricing waterfall charts. Remember, your company may have different key elements to incorporate into your pricing waterfall chart. 

Base Price  

Most often, the price waterfall chart begins with Base Price, but it can also begin with any list price if there are no attributes or market and currency adjustments to apply. 

The base price is simply the initial price of your organization’s goods or services based on your costs of production without taking anything further into consideration such as currency adjustments, discounts, rebates, freight etc. 

List Price 

The List Price is the public or recommended price that is not typically customer specific, and it will be your starting or initial price set for a product or service. The list price is also sometimes known as the manufacturer suggested retail price (MSRP) and it is an ideal price as defined your company’s costs and profit margin goals. 

In the case of multinational companies, the list price may be determined by multiple items including a global list price that is adjusted based on currency exchange rates or market and regulatory specifics resulting in a local list price. 

On-Invoice Discounts  

On-invoice discounts could include volume, quantity or competitive discounts that may appear on the invoice sent to your customer (depending on your company’s strategies and commercial arrangements). 

Off-Invoice Discounts  

 Off-Invoice discounts may include several elements including rebates, freight savings or payment terms that do not appear on the invoice. 

Invoice Price  

 At the Invoice Price level, explicit on-invoice discounts are withdrawn from the list price. 

Pocket Price 

Once rebates, shipping and distribution costs and promotional expenses are factored into your price, you arrive at your Pocket Price. 

Pocket Margin 

The Pocket Margin is the amount of money in your organization’s pocket after all the discounts and costs have been applied including research and development costs and other variables. 

Which Departments Might Use the Pricing Waterfall in your Organization? 

Naturally, your Pricing Department will make significant use of your pricing waterfall charts. In fact, being able to simply visualize where your profit margin gaps and leaks are, rather than needing to sift through hundreds of thousands of lines of data on Excel spreadsheets will save your pricing team considerable man hours. 

With the time saved, your team can do what they do best, spend more time strategically looking for savings and value points and the smart ways your organization can be more profitable. 

Other departments that might use and find value in your pricing waterfall charts include the:

• Sales Department – As the pricing waterfall keeps track of sale prices, promotions, rebates, and refund policies, if your sales department the most current figures and information it needs at its fingertips, it makes it easier for your salespeople when talking with prospects and negotiating sales and pricing and placing products within your portfolio. 
• Product Management Department – Your Product Management Department can also benefit from having the most current pricing data. The insights produced from your pricing waterfall can be important when it comes to determining production runs. Your product manager must know what is hot and what is not when they are looking to schedule the manufacture of an item or a part, as the price of that item or part is often what makes it hot property (or not).
• Accounting Department – Accounting also needs the best, most reliable information about pricing to do its job of balancing the books. Obviously, when a person knows how much money is coming in based on current prices, it makes it easier and less stressful to pay the company bills. Also having full visibility of the effects of both on-invoice discounts, like currency and local market adjustments, is critical for the accounting team. Confidence, accuracy, and reliability in accounting also makes for smiling faces of senior management and your company’s shareholders. 

• Marketing Department – The Marketing Department requires the insights of your pricing waterfall so they can perform some of their key roles in the promotion of the company’s product or service with sale prices, rebates, promotions, and digital marketing. Imagine trying to determine the rate of a rebate or discount if you did not easily know how that incentive impacted your profitability? Yikes – what a nightmare!  

How Can I Get Started with a Pricing Waterfall or Learn More? 

Now you know what a pricing waterfall is, how it works and why you need one in your pricing regime to power compelling pricing insights for your company. 

If you have already established that a pricing waterfall powered by price analytics software like that offered by the award-winning Pricefx solution can help your organization achieve its business objectives, you might want to talk to one of our pricing technology experts now: 

On the other hand, if you would like to continue your learning journey on the new age set of key performance indicators (KPIs) that price waterfall technology unlocks, check out this handy article below: 

Happy Pricing!