The dynamics of the business landscape are rapidly evolving. It is increasingly becoming more competitive and complex. Business owners are looking for ways to be more price competitive.
Although it is not easy to know the competitors and market, businesses also face challenges in pricing their services and products. This results in many hidden costs before the final products or services reach the customer. Finding the right price that benefits the business while meeting customer expectations can be challenging.
In this article, you will explore “what is price waterfall?” You will also navigate through how price waterfall analysis helps manage expenses while exploring the waterfall pricing mistakes that kill organizations’ revenue. This will give your business a clear view and ensure that you are making money as businesses use price waterfall analysis.
What is Price Waterfall?
A price waterfall is a visual analysis tool enterprises use to check all the factors that collectively go into the pricing of services and products. This includes direct costs like labor and materials used, along with indirect costs like marketing, rent, and overhead expenses. By using price waterfall strategies, organizations can easily understand the flow of purchase price and how it finally reaches the pocket margins (NET or NET 3).
The price waterfall analysis helps businesses understand the overall flow of their expenses and how they need to save on their expenditures. It helps organizations identify the profits and revenue from each transaction while sealing the margin leakage for the areas with ineffective pricing.
Pricing waterfall is an effective process for visualizing the steps involved to easily monitor the complete procedure that will make up the entire pricing transformation. For instance, the price listed on the customer’s invoice will undergo a series of transformations at different levels for accuracy.
To understand better, in the image above, several organizations do not measure price based on the printed invoice, which includes the listed price minus the assorted discounts. For instance, the company has estimated the price realization to be $80 for a product if it’s priced at $100 and the discounted price is $20. Several other features impact the product’s pricing, like warranty, payment terms, free delivery, rebates, and more. Based on the business module, the pocket price is nearly 20%-30% less than the total cost mentioned in the invoice. This impacts the business’s profits, resulting in only marginal gains from some customers.
Understanding What Is Price Waterfall Analysis?
Price waterfall analysis is a well-structured module that helps establish the most effective list price for the business’s services or products. It begins with a base price, and changes are made by either decreasing or increasing other key elements like desired profit margins, costs of sold goods, and competitor’s pricing. After a thorough evaluation of each component, organizations can develop price waterfall strategies that maximize profit margins and revenue.
What are the Benefits of Pricing Waterfall?
The implementation of a price waterfall is not easy. It requires energy, time, financial investment, and resources. But integrating them into the business has enormous benefits:
Potential Market Opportunities
Implementing a price waterfall allows the business to analyze whether its products or services are underperforming in any region. This will help it improve and transform itself to make more profits.
Elevate Customer Communication
Waterfall pricing strategy enables businesses to upgrade their customer communication by emphasizing product value, such as discounts, or offering value perception for products.
Observing the Impact of On & Off-Invoice Discounts on Products
Price waterfall helps identify whether the off-and-on-invoice discount amounts are relevant and justified. Reduction of the amount in either category will immediately impact the organization’s fiscal bottom line.
Transparency in Total Price
The waterfall pricing helps identify implicit and explicit elements of the product’s costs. It offers visuals for everyone to see, including local and global adjustments, quantity discounts on underperforming products, currency modifications, and more. This will help businesses understand service costs and internal selling, which impacts profitability.
Profit Maximization
The price waterfall chart helps spot margin leakage across products, transactions, and customers. It also identifies margin gaps to plug, which will help achieve the improved profit price for products in every single transaction.
Value-Based Negotiation
It is a powerful methodology that helps segregate the waterfall pricing into smaller sections up to the “pocket” price level. It will enable the seller to create several negotiating areas to attain the best price suitable for a wider cost corridor.
For example, discounts are removed from bills when customers make an early digital payment or get special rates for early bulk shopping. It creates a fair deal and benefits both the buyer and the seller.
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The Importance of Price Waterfall in the Revenue Management
Evaluation of pricing policy is essential for revenue management for primarily two reasons:
- They enable businesses to clearly understand costs, which helps them price their services and products accordingly.
- They help track the progress of the business, i.e., assess whether they have met the profit objectives.
Revenue management mostly focuses on profit; therefore, price waterfall analysis is the most efficient way to ensure that the pricing strategy is accurate for the business’s products and services.
Price Optimization
Setting the right price for services or products is a complex task, and no perfect price satisfies customers’ expectations while covering the entire cost. The objective of price optimization is to create a balance between price and quality so that both the business goals and customers’ requirements are met.
For example, an enterprise may be offering lower prices for bulk purchases or charge higher for custom orders. By leveraging price waterfall analysis, businesses can customize the pricing for services and products according to the customers, maximizing profits and minimizing potential losses.
Waterfall pricing also offers valuable insights into understanding customer preferences and requirements. It results in a greater understanding of future pricing strategies, which can help in personalizing products and services better to meet the customer’s requirements.
Profit Leakage Identification
Another significant advantage of using price waterfalls for transaction price management is the ability to identify the areas that are not performing well and losing money. This is also known as “profit leakage” or “revenue leakage.”
For example, the cost of production of a particular product in a company is $100, and it is sold for $120. The customer pays an extra $10 for shipping and handling charges, resulting in a profit margin of $10 or 8.3%.
Now, let’s say the company later decided to offer free shipping on this product. The customer is still paying $120, but the shipping and handling prices have increased to $15. Then, the company’s profit margin dropped to $5 or 4.2% only.
By assessing the complete breakdown of the costs of goods sold (COGS) through price waterfall analysis, the organization can understand that free shipping is directly impacting its profitability. This allows it to identify and address all potential profit leaks and helps it make better-informed decisions to improve its profit margins.
What are the Different Types of Companies That Can Benefit from a Pricing Waterfall?
Organizations that have more advantages of incorporating price waterfall in their business are those who are seeking to:
- Significantly enhance their efficiency.
- Attain significant achievements in making profits and market share by offering more effective strategies and pricing.
- Quickly unlock additional revenue and boost margins that can be generated with “quick wins” by addressing pricing misalignments and leakages.
What are the Top 5 Price Waterfall Mistakes Killing Your Business Revenue?
Implementation of price waterfall is not easy. Here are the top 5 pricing waterfall mistakes that are killing your business revenue:
Manual Errors and Incorrect Calculations
Manual price calculations carried out on a spreadsheet, or any other legacy application are more prone to human error. Small errors like misplaced decimals or outdated cost entries can result in over-discounting or underpricing, leading to substantial overall revenue loss across transactions.
Inefficient Discount and Rebate Management
Without automation, complex discount frameworks and rebate programs are challenging to track. When these discounts or rebates are misapplied, such as by offering high discount prices to low-volume customers, lost revenue and margin erosion can result. This is mostly due to a lack of visibility and can result in further problems.
Data Integration and Lack of Visibility Issues
Most enterprises lack real-time visibility for monitoring their pricing performance or obtaining accuracy regarding timely transaction data. Without this information, they will not be able to identify where they are losing money or create pricing optimization strategies. This can result in missing out on revenue-generating opportunities and profit margin erosion.
No Customer Segmentation
Failing to cater to the customer segment means following a one-size-fits-all pricing approach. By following the pricing strategy, businesses ignore the fact that different customer segments value products differently and may be willing to pay more for them. With a proper strategy for segmented customers, companies will leave potential money-making opportunities and risk losing high-value customers to other competitors.
Delayed Response to Market Changes
Inflexible and static price approaches prevent businesses from reacting quickly to market changes, such as a shift in customer demand or competitor actions. Delayed pricing modifications can result in revenue leakage and market share loss in the evolving market landscape.
Understanding How to Develop CPQ Price Waterfall?
CPQ (Configure, Price, Quote) solutions use a functionality known as the waterfall pricing strategy. This strategy offers a transparent breakdown of the final price of the product or service. It is generally a step-by-step visual guide that navigates from the initial list price to the net price paid by the customers.
Turn Pricing into a Competitive Advantage with Cincom CPQ
Errors in pricing can cause significant issues in companies’ finances. Businesses can seamlessly transform pricing to strategic advantages by leveraging business insights and automated technologies. By embracing smart price waterfall analysis, organizations can optimize revenue and turn pricing into a powerful tool for financial growth and opportunities.
After understanding how using CPQ pricing waterfall will boost your pricing regime with compelling insights, what are you waiting for?
Help your organization boost revenue by unlocking price waterfall technology. Take control of your pricing today. Don’t wait and lose potential opportunities.
Automate, Protect, and Grow with Cincom CPQ. Happy Pricing!
FAQs
1- What is a price waterfall?
A pricing waterfall is a visual tool that allows businesses to explore discounts, rebates, and costs of the product’s final pricing. It breaks down all the factors and adjustments, helping businesses understand where revenue is gained or lost.
2- Why are organizations using waterfall pricing analysis?
Organizations use waterfall pricing analysis to identify hidden costs, spot revenue leakages, and offer strategies to maximize profits.
3- How does the CPQ pricing waterfall help with customer communication?
CPQ pricing waterfall provides transparency, making it easier to explain pricing breakdowns to customers and justify the final price.
4- What are the main benefits of using a pricing waterfall?
Key benefits of waterfall pricing include
- Improved profitability
- Better visibility into pricing processes
- Identification of profit leaks
- Effective pricing decisions
5- What are common elements included in waterfall pricing?
The key elements in waterfall pricing are list price, standard discounts, promotional discounts, rebates, shipping, handling, and any off-invoice adjustments.
