Price Waterfall

Start with one comparable unit, since a price per case, per item or per contract should be consistent through every step of the waterfall. Write the list price at the top, which may be a published rate or internal reference and is not what most customers necessarily pay.

Subtract on-invoice discounts, as volume, promotional and negotiated discounts may appear directly on the customer invoice, and the result is invoice price, which is visible in billing records but may overstate what the seller keeps. Subtract off-invoice rebates, because a customer may earn an end-of-year volume bonus or receive a separate credit that is not visible on each original invoice.

Consider other allowances such as cooperative marketing funds, special terms and performance credits, which can lower the realised economics. Account for freight or payment terms if the chosen pocket-price definition includes them, and state the treatment so one report can be compared with another.

A simple example starts at $100, subtracts $12 on invoice and $10 off invoice, leaving a pocket price of $78, with product production costs not yet deducted. Do not call pocket price profit: if the product costs $55 and account-specific support costs $8, an illustrative pocket margin is $15 on the same unit.

Trace each step to records, so that invoice lines, rebate agreements, credits, shipping invoices and customer terms reconcile to the reported figures. Match the period, since an annual rebate should be allocated to the relevant sales in a consistent way and one month's apparent price can change after year-end settlement.

Use net versus gross terms clearly, because tax collected on behalf of authorities should not be mistaken for seller revenue, though accounting treatment varies by context. Compare customers appropriately, as a large account may earn discounts because it buys efficiently or costs less to serve, so a wide price range is not automatically a problem.

Investigate outliers, since a small customer with a very low pocket price might have an old concession while a large customer with high pocket price might receive costly extra services instead. Examine quantity, because a low unit pocket margin can still matter if volume is substantial and negative-margin volume needs careful review.

Look at deal terms together, as a discount combined with free shipping and extended credit can be more costly than any single item suggests. Use the waterfall for negotiations, since it can show which concession has the clearest value to the buyer and cost to the seller, but do not remove all rebates blindly because some incentives may support profitable volume or reliable payment.

McKinsey describes the pocket price waterfall as a way to see revenue retained after on- and off-invoice reductions and distinguishes pocket margin after costs to serve, and Pricefx also describes mapping hidden reductions across price levels. Keep product cost separate from price reductions where useful, update after policy changes such as new freight rates or rebate programmes, and build controls on exceptions so a discount outside a price corridor can be reviewed before approval, because for an owner the waterfall turns a quoted price into a clear view of what the business actually earns, and its strength is tracing each difference, not merely drawing a descending chart.