The Price Waterfall is a powerful tool for identifying hidden costs, and shows how much revenue companies really keep from each of their transactions. It can be used to seal margin leakage by identifying areas where prices can be increased, or alternatively to ensure you are capturing more of the price that you already, in theory, charge.
It typically starts with a list price, or recommended price, that is often publically available, but not customer specific. From here the negotiation begins. For example, if a product is priced at £100 and a standard customer discount is 20%, the Invoice Price is £80 (on-invoice). Most companies stop measuring pricing at this point, forgetting the many other discounts and value added features that impact price, such as cash discounts, volume rebates, warranty, free delivery. Research has shown that the average company offers at least 5 additional discounts beyond the Invoice Price (off-invoice) to reach the money you actually receive "in your pocket".
Significant amounts of money can leak away, and by consciously managing all elements of the pocket price waterfall, companies can often find and capture an additional 1 percent or more in their realised prices. Indeed, an adjustment of any discount or element along the waterfall—either on- or off-invoice—is capable of improving prices on a transaction-by-transaction basis.
Two examples of this in action:
- A chemical supplier provided free delivery as standard, and if necessary allowed sales staff to waive charges on emergency deliveries. After completing waterfall analysis, it was found that 50% of orders were being considered as emergency at an annual cost of £2.5 million. A policy change was implemented enforcing a minimum charge for emergency orders. This dropped emergency orders to 10%, saving the company £2 million with no impact on sales volumes.
- A building products company offered free returns to try and differentiate themselves from the competition. After completing waterfall analysis it was identified that 35% of products were being returned. The policy was changed to making the customer responsible, and immediately saw a 50% decline in returns, and subsequently a 0.5% improvement in bottom line.
A large number of companies still don't understand the untapped opportunity, with much of it being low hanging fruit. Learn to love this concept, and you will reap the rewards in improved profitability.