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Is your List Price the actual price you are selling to your client?
It isn't, but how do you determine the product's price?
The answer is simple – Price Waterfall!
This is a powerful tool that indicates actual price erosion by going through several items that may impact your price!
Want to see what items erode your price?
We’re pleased to share with you the knowledge of our Valueships experts. Today, we introduce Jakub Jukowski, our Business Analyst, who will tell you more about the (surprise, surprise...) prices!
Let's delve deeper into that topic!
Generally speaking, the Price Waterfall is a business tool used to analyze and break down the various components that affect the final price of a product or service. It's like dissecting the pricing structure to understand all the factors that influence the end cost. Thanks to breaking down many elements, for example, discounts, rebates, taxes, and costs, companies like yours can gain insight into their pricing strategies and profitability.
So, essentially, it's a detailed examination of how pricing decisions are made and how they impact the overall financial health of the business.
Imagine you have your pricing page and, on it, your magnum opus – your best product ever! Priced at only 100 USD per month.
Now, since you have your product already launched, it's time to do some counting and find out how much of that sweet MRR you are going to make! The most basic way to do it would be to take your product price – 100 USD – and multiply it by the number of your Active Users.
Easy peasy, or is it?
Well, assuming you are selling your product to everybody at the List Price present on your website, then it is easy.
But, while working with our clients, especially those selling Enterprise solutions, we are often met with discounting in various shapes and sizes.
Is discounting bad?
No, if you are using it correctly, and you can distinguish between your List Price, your Invoice Price, and most importantly, your Net Price (this is the most challenging part).
All right, but then what are the elements of Price Waterfall? Among the main ones are:
Hmmm, a lot of these prices. We're already telling you what they’re all about.
Easy one. This is the price you display to potential customers on your website. For example, in the Pricing tab you offer several types of subscriptions, with the most expensive one being $599.00. This is the List Price.
Another easy part of your Price Waterfall. You take your List Price and subtract the usual invoice items - Channel Discounts, Strategic Discounts, etc. When you are finished, you end up with your Target Price - the actual price you are trying to sell the product to your customer.
But oh! The potential client still doesn't want to buy your product - it is still too expensive. So, you give them a Tactical Discount of 7%. It is a hard pill to swallow, but the deal is a deal. Then you get an Invoice Price.
So, it's all right? You can go and calculate your MRR.
Well, not exactly...
As we get closer to the Net Price, there are also Payment Terms and Rebates.
While Payment Terms can be an excellent incentive for your customers, they can also be a big deal in terms of price erosion. The longer the payment terms your customer has, the greater the value erosion due to the value of money over time.
Sometimes, the discounts you give to your customers are hidden and not obvious (even to you!) Most of the time, items such as Rebates, which are provided for customers buying in bulk, are not present on the invoice. But they are there!
And in this way, we have Net Price. This is the final figure that remains after all the components of the Price Waterfall have been accounted for.
Essentially, it's what ends up in the company's coffers after all the calculations and adjustments have been made.
Here’s how the example Price Waterfall looks.
As you see, there are on invoice discounts as well as off invoice discounts. Remember about both of them.
But let's also clarify this topic: Why is Price Waterfall so essential for calculating your MRR?
Because thanks to the insights gleaned, you can learn your prices, optimize your pricing strategy, maximize MRR, and ultimately achieve long-term business success.
Is it? So how does it work?
Price Waterfall provides information on how your pricing strategy impacts your bottom line. When you analyze each component of the Price Waterfall, from base price to strategic discounts, tactic discounts, rebates, etc., you can:
For example, you may discover that certain discounts are eroding your profitability or that adjusting your pricing structure could lead to higher MRR without sacrificing customer satisfaction.
What’s the conclusion?
That the Price Waterfall empowers you to make data-driven decisions that drive MRR growth. It allows you to see beyond the surface-level metrics and understand the true financial implications of your pricing decisions.
And now you know that understanding the Price Waterfall is crucial for evaluating the profitability of your product or service and making informed pricing decisions.
Since you analyze factors like the effectiveness of discounts, the impact of rebates, and the contribution of various pricing components to overall revenue, you can fine-tune your pricing strategy for optimal results and make strategic decisions that can positively impact your MRR.
So, have you subtracted all those factors from your List Price? If so, what is your Net Price?
Share your opinions on price erosion and what is the actual price of your product.
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Certified expert in price, revenue and margin management in B2B companies and e-commerce. Member of the prestigious Professional Pricing Society. At Valueships, he is responsible for the implementation of consulting projects and taking care of the profitability of clients. Prior to joining Valueships, he worked at McKinsey & Company in the area of pricing and strategy.
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Certified expert in price, revenue and margin management in B2B companies and e-commerce. Member of the prestigious Professional Pricing Society. At Valueships, he is responsible for the implementation of consulting projects and taking care of the profitability of clients. Prior to joining Valueships, he worked at McKinsey & Company in the area of pricing and strategy.
