A list price is a starting point. By the time a sale reaches the bottom line, it has passed through a series of discounts, rebates, promotions and terms. A pricing waterfall lays those steps out in order, so you can see what you really keep. McKinsey made the idea famous with the pocket price waterfall, which shows how much revenue a company really keeps from each transaction.
How to build one
- Start from list price or gross sales for one customer, channel or SKU group.
- Deduct each on-invoice discount as its own step.
- Deduct off-invoice items, such as rebates, promotional funding and payment terms.
- Arrive at net price, then take off product cost and other direct costs to reach margin.
What to look for
A single waterfall is useful. Comparing them is better. Set two similar customers side by side, or the same customer across two years, and the questions appear quickly. Why does one customer get a rebate the other does not? Why has a promotional step grown while volume stayed flat?
The most valuable finding is usually a term that nobody can explain. It was agreed years ago, the reason has gone, and it continues. Those are the easiest conversations to reopen.
Using it in a negotiation
Before a negotiation, I want the commercial team to know three things: the current net position of this customer, how it compares with similar customers, and what each possible concession would cost. With a margin scenario model behind the waterfall, the team can test an offer in the room and see the effect at once.
Make it routine
A waterfall built once for a big negotiation helps. One that is refreshed regularly, by SKU and channel, becomes part of pricing governance. It is also a natural place for AI to help, by flagging customers or SKUs that drift away from the normal pattern.
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