Profit Leakage Analysis Services...

increase profit by identifying and plugging price leakage at the deal!

Take care of the pennies and the pounds will take care of themselves’ is the underlying philosophy of the price waterfall concept. The price waterfall helps an organisation to increase profit by identifying and plugging Profit leakage at the deal / transaction level.


Before we go any further, it is essential to understand the power of pricing. A 2% price increase would, on average, lead to a 15% profit increase for FTSE 100 companies. Exhibit 1 shows that this ranges from 5% to over 100%. Achieving a 2% price increase is ambitious, but possible. In most organisations, stopping the Profit leakage during Project implementation will itself be sufficient to achieve these results. This article focuses on the Profit waterfall, a key methodology to stem Profit leakage. Call us @ 317-851-0936 today to learn more about our small business accounting services or to schedule a consultation to discuss your needs..

HOW DO YOU IMPLEMENT A PRICE WATERFALL?

  • Concept Development Phase

    List price - every price waterfall should start with the list (or gross) price. Even if a company does not use it for its customers it should define a list price internally to make the pricing process more structured and internally transparent. The list price should reflect the overall product value, product strategy, and competitive strength, and should take into account the discounts and rebates granted and the standard services given away for free. Based on our experience, marketing should own the process of setting list prices, but to ensure that internal expertise is fully utilised, sales input should also be taken.

    • Invoice price - currently, most companies manage the invoice price which equals the list price minus on-invoice discounts (discounts mentioned on the invoice). It does not reflect the true worth or profitability of a transaction as it does not take into account off-invoice discounts (discount not mentioned on the invoice) and customer-specific costs (e.g. additional transaction cost due to small lot orders). However, invoice price should still be an element of the price waterfall because sales teams usually negotiate the invoice price with the customer, and only when they see the invoice price as an element can they follow the rationale of price waterfall.
    • Higher profits - the primary function of a price waterfall is to pinpoint where the leakages are (customers, products and transactions) and enable the organisation to achieve the best price in every single transaction. For example, in Exhibit 2, there is no price leakage at the invoice price level and there is a price leakage of 6 index points at the net price level. Identifying and eliminating this price leakage (due to off-invoice discounts) can potentially improve the pocket margin from 14 points to 20 points, a 43% improvement in profitability for this transaction.
    • Better control - the price waterfall can be used as the basis of a disciplined data driven approach to measure and control the effectiveness of the pricing process (using outcome KPIs as mentioned earlier).
    • Request a quote to speak to us about accounting services for you and your business.
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