Definition
The "falls" created between catalogue prices and exchange prices by leakage of price margin for predatory pricing (freight, return, discounts, concessions, advertising subsidies, etc.) should be incorporated into pricing strategies or eliminated.
In detail
The transaction price waterfall describes the stepwise decreasing structure from list price to final transaction price due to various price concessions such as freight, rebates, discounts, allowances, advertising subsidies, etc. Like a waterfall, each level represents a price leakage, ultimately causing actual revenue to be far below the list price. In the pricing system, it is used to diagnose specific links of profit leakage, helping managers identify which concessions are necessary and which can be negotiated or eliminated. Unlike simple price discounts, it focuses more on hidden costs across the entire chain. Its output is typically a price waterfall chart or detailed table, clearly showing each concession item and its proportion, providing a basis for pricing strategy optimization. This chart is the same as the pocket-margin waterfall in the Pricing and Margin Management card, which emphasizes turning it into pricing actions.
Example in practice
An industrial equipment manufacturer finds gross margin continuously declining, but sales discount rates have not increased significantly. Finance reviews each order, listing catalog price, standard discount, special concessions, logistics surcharges, annual rebates, etc., forming a price waterfall chart. Results show non-standard logistics surcharges and customer annual rebates account for 40% of price reductions, and some rebate conditions are too lenient. Management renegotiates logistics contracts and tightens rebate policies, ultimately improving actual profit without adjusting catalog prices.