Price waterfalls for people who hate spreadsheets
A price waterfall shows where the money goes between the list price and what the customer pays. You can draw one for a single customer on a napkin.
Pricing and commercial
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4 min read
In short
Start from the list price and subtract every discount, rebate and free service.
Do it for one customer before you do it for a thousand.
The biggest step is rarely the one in the price list.
Most companies know their list prices and their revenue. Very few know what happens in between. A price waterfall is simply that in-between, drawn as a staircase: the list price at the top, then every step the money takes on its way down to what the customer actually pays.
One customer, one napkin
Pick one customer you think you know well. Start with the list price of what they bought last year. Take off the negotiated discount. Then the volume rebate, the payment-terms discount, the free freight, the marketing contribution, the rush orders you didn’t charge for, the returns you took back. What is left is the pocket price, and it is usually a surprise.
The steps that hurt are rarely the ones in the price list. They are the ones nobody decided: the freight that was free “just this once” in 2019, the payment terms a salesperson agreed in a hurry, the small orders shipped at pallet prices.
Then do it for everyone
Once one waterfall makes sense to the management team, the same steps can be drawn for every account from the ERP and the freight invoices. Sort the accounts by pocket price and the pattern is usually plain: a long tail of customers who are given away more than anyone intended.
You don’t need to love spreadsheets to run a business on this. You need one picture, looked at every month, and somebody who is allowed to say no.