See where the price goes

Your report suggested a move on your view from list price to pocket price.

Pocket price is what is left after every discount, rebate, payment term and freight cost you absorb. This move guide builds that view for your biggest customers and gives the biggest leaks an owner. Those leaks become the first work in taking control of discounts and making every giveaway buy something.

If you took the consumer check, go to the consumer section. If your products reach shoppers through retailers, go to the section for brands.

1. When it applies

Use this move guide if your report placed this practice in the lowest two stages.

If it already sits at the middle stage or higher, skip this move guide. The next stage up reports pocket margin by customer and segment, with an owner for each big leak.

If your report gave the foundation moves, this is one of them. It can start once the first version of one source of pricing data exists.

2. What to do

Five steps, in this order. They take three to four weeks, overlapping the data work.

1. List every step from list to pocket. Include on-invoice discounts, off-invoice rebates, settlement terms, freight you absorb, free goods and extras waived.
2. Build the waterfall for your ten biggest customers. Show each step per $100 of list price. Then build it by segment and by channel.
3. Set pocket price against volume. For each customer, put pocket price beside annual volume. Mark the customers whose discount has no link to their size or value. Table A below does this.
4. Rank the leaks. A leak is a step in the waterfall with no link to the customer's volume or value. Give the two biggest an owner each and a date.
5. Refresh it each quarter. Note the biggest change since the last one.

The free worksheet does the recording: /worksheets/pricing-b2b/waterfall-visibility, for the ten-customer waterfall, the discounts beyond policy and the two biggest leaks.

The pocket price calculator shows the idea in one screen. Use it to open the conversation at the pricing forum.

3. What to produce

One table, plus the worksheet above.

Table A. Pocket price against volume

A large customer with a low pocket price may have earned it. A small customer with a low pocket price usually has not. A gap with no reason is a leak.

4. A worked example

Illustrative. Written for this move guide. It describes no client.

An electrical wholesaler sells to about 2,500 contractors and 40 resellers.

The waterfall.

• For its ten biggest customers, $100 of list became $81 on the invoice and $72 in the pocket.
• Off the invoice, rebates took $4, settlement terms $2 and freight the business absorbed $3.

Pocket price against volume.

• The eighth-largest customer had the lowest pocket price of the ten.
• Its rebate had been set when it was the largest customer, and nobody had revisited it.
• Two mid-sized resellers received free freight on every order, whatever its size.

The leaks.

• The two biggest were freight given away and a rebate paid on total sales with no condition.
• Each got an owner: freight to the operations manager, the rebate to the key account manager.

One quarter on.

• The waterfall was refreshed for the quarter, now by segment as well as by customer.
• Both leaks had a first action on the pricing forum's minutes.

On a retake, the practice could be answered at the middle stage.

What it looked like in our work

From our own work. Figures changed.

A building products business, list price to pocket price, per $100 of list, averaged across its customers.

The standard discount was set by customer and product bundle, across many thousands of combinations. No authority levels governed the special prices. Rebates were managed at head office, out of sales' sight. The person making the buying decision often could not see the full benefit they received.

From list price to contribution

From our own work. Figures changed.

A distributor of business supplies drew its waterfall past the pocket price, down to contribution. The figures are indexed to list price and averaged across its customers.

Thirty points of list price went before material cost. Four small items after the invoice took ten of them. Building one for each product is slow work, so start with the largest lines.

5. Effort and dependencies

What you need

• Invoice lines from one source of pricing data.
• Rebates, settlement discounts and freight by customer, from the ledger.

How long

• Three to four weeks, overlapping the data work.
• Then a refresh each quarter.

What gets in the way. We have seen these in our own work:

• Undocumented leakage. A distribution business ran five overlapping price schemes. Most of the leakage was undocumented, and its largest distributors held the pricing power.
• Rebates the buyer cannot see. In a building-products case in our own process notes, branch buyers could not see the rebates agreed at head office. So they misjudged the net price.
• Freight given away. An equipment maker could have charged freight on many orders below its free-freight threshold, and did not. More shipments missed freight through operational error.

What we have seen. "Discounts and rebates often cost more than the profit they protect: we have seen them run at 5–16% of sales, and in one business at three times EBIT." We have seen this in our own work. It is not a forecast for yours.

6. How will you know it worked?

The test is whether the waterfall is kept up and the leaks have owners. Retake the check after one quarter's refresh. This should be true when you answer:

For consumer businesses

This section is for the B2C Consumer Pricing Health Check. Here the price goes in two ways: giveaways at the till and online, and fees and "was" prices that change what the customer pays.

When it applies

Use it if your report placed either practice in the lowest two stages.

This move guide measures the giveaways. The rules for who may give what away are in taking control of discounts.

What to do

1. Total one month of giveaways, line by line. Count vouchers, discount codes, staff discounts, price-matches and goodwill refunds.
2. Give the biggest line an owner.
3. Report every line each month. Table B below keeps the series.
4. Walk your own checkout in every channel. Buy as a customer would. Write down each fee that appears after the first price, and each "was" price with its price history.
5. Fix any fee or "was" price that breaks the rules this month. Have someone who knows consumer law check the fix.

The two free worksheets do the recording:

• /worksheets/pricing-b2c-direct/leakage for the month of giveaways;
• /worksheets/pricing-b2c-direct/price-transparency for the checkout walk and the "was" prices.

What to produce

Table B. Giveaways by line, month by month

A worked example

Illustrative. Written for this move guide. It describes no client.

An online furniture retailer also runs six showrooms.

The month of giveaways.

• Giveaways came to $180,000 on sales of $9m. Goodwill credits for late deliveries were the biggest line.
• The head of customer service became its owner, and the line was reported every month after.

The checkout walk.

• On the website, a $79 delivery fee first appeared on the payment screen.
• Twelve sofas showed a "was" price they had not sold at in the previous three months.
• The delivery fee moved to the first price shown. The twelve "was" prices came down the same week.

On a retake, both practices could be answered at the middle stage.

Effort and dependencies

• Who. Finance totals the giveaways. The pricing owner assigns the lines. Someone who knows consumer law joins the checkout walk.
• What you need. A month of giveaways from the till, the website and customer service. Price history for every product shown with a "was" price.
• How long. Three to four weeks, then a monthly report.
• What gets in the way. Giveaways booked in three places: the till, the website and the customer service system. Agree one total before you assign owners.

How will you know it worked?

For brands selling through retailers

This section is for the B2C via trade Brand Pricing Health Check. Here the price goes in trade spend: the money you pay retailers and distributors in terms, rebates and promotions, on the invoice and off it.

When it applies

Use it if your report placed this practice in the lowest two stages.

What to do

1. Name the buckets. Put every term in one named bucket, such as on-invoice discount, rebate, promotional funding, listing fee or payment terms.
2. Build the waterfall for your ten biggest customers. Show list price, net invoice and net-net per $100 of list. Net-net is what is left after every term, on the invoice and off it. Table C below sets out the buckets.
3. Build it for your twenty biggest products the same way.
4. Reconcile it once to the ledger.
5. Report it monthly by customer and product.

The free worksheet does the recording: /worksheets/pricing-consumer-trade/net-revenue-visibility, for the buckets, the two waterfalls, the reconciliation and the monthly report.

Trade-spend rate is your trade spend as a share of gross sales. A point of it is one per cent of gross sales.

What to produce

Table C. The buckets

A worked example

Illustrative. Written for this move guide. It describes no client.

A beverages brand sells through the two big grocers, liquor chains and convenience.

• The sales team's spreadsheet put trade spend at 14% of gross sales.
• The waterfall, with contract prices and off-invoice terms counted, put it at 22%.
• Promotional funding paid through a second ledger account made up most of the gap.
• Each term went into one of six named buckets, and the waterfall was reported monthly by customer and product.

On a retake, the practice could be answered at the middle stage.

Effort and dependencies

• Who. A finance analyst builds the waterfall. The pricing owner names the buckets with finance.
• What you need. Invoice lines, the terms agreements, and the ledger accounts where off-invoice spend is booked.
• How long. Four to six weeks for the first waterfall.
• What gets in the way. Trade spend booked as a cost in marketing or in sales. Bring it into the waterfall before you compare customers.

How will you know it worked?

The worked examples are illustrative.

Think we've used your work without proper credit? Tell us and we'll fix it.