The invoice admits 12.8 points of discount. The pocket price waterfall finds 24.0, and more than half of the contribution.
Pocket price is list price less every on-invoice discount, then less every off-invoice deduction taken as a share of the invoice: list × (1 − on-invoice rates) × (1 − off-invoice rates). On a 148.00 list price with 12.8 points of discount on the invoice and seven deductions worth 12.8 per cent of invoice after it, the invoice reads 129.03 and the pocket price is 112.51, 24.0 points below list. Contribution falls from 67.04 a unit at list to 31.93.
Worked in full in Pricing Strategy by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The invoice price is the number the sales team sees and the ERP reports. The pocket price is what the company actually keeps once rebates, allowances and credits have been paid out, usually weeks later and through a different ledger. The gap between the two is where most pricing money leaks, and it is invisible until somebody builds the waterfall line by line.
The case is one account from the companion files of Pricing Strategy: DIS-024, a distributor buying 1,181 units a year of structural adhesives from a fictional manufacturer, Ravensworth. Every rate below is the account's own.
| Input | Basis | Value |
|---|---|---|
| List price | per unit | 148.00 |
| Variable cost | per unit | 78.00 |
| Order-size discount | share of list, on invoice | 6.0% |
| Negotiated discount (11.0% headline × 0.62) | share of list, on invoice | 6.82% |
| Seven off-invoice deductions | share of invoice | 12.8% |
| Sales commission | share of invoice | 2.0% |
| Units a year | 1,181 |
Note the negotiated rate. The account's headline discount is 11.0 per cent, but on this family the buyer pushes less hard, so the rate actually paid is 11.0 × 0.62 = 6.82 per cent. A waterfall built on the headline rate would already be wrong at the second step.
Two bases matter. On-invoice discounts are quoted as a share of list and are added together. Off-invoice deductions are quoted as a share of the invoice and come off the invoice price.
Invoice = List × (1 − order-size − negotiated)
Pocket = Invoice × (1 − sum of off-invoice rates)
=B2*(1-B4-B5)*(1-SUM(B7:B13)) with list in B2, the two on-invoice rates in B4:B5 and the seven off-invoice rates in B7:B13.| Step | Rate | Per unit |
|---|---|---|
| List price | 148.00 | |
| Order-size discount | 6.0% | −8.88 |
| Negotiated discount | 6.82% | −10.09 |
| Invoice price | 129.03 | |
| Annual volume rebate | 3.5% | −4.52 |
| Cash discount, 2/10 net 30 | 2.0% | −2.58 |
| Freight allowance | 1.5% | −1.94 |
| Co-operative marketing | 2.5% | −3.23 |
| Growth bonus | 1.5% | −1.94 |
| Returns and credits | 0.8% | −1.03 |
| Promotional allowance | 1.0% | −1.29 |
| Pocket price | 12.8% | 112.51 |
| Variable cost | −78.00 | |
| Commission on invoice | 2.0% | −2.58 |
| Contribution | 31.93 |
The invoice shows a discount of 12.8 points of list. The pocket price sits 24.0 points below list, 1.87 times what the invoice admits. The seven off-invoice lines cost 16.52 a unit, more than either on-invoice discount.
The margin consequence is larger still. At list, a unit would carry 148.00 − 78.00 − 2.96 of commission = 67.04 of contribution. At pocket it carries 31.93. The discounting has taken 52.4 per cent of the contribution while taking 24.0 per cent of the price, because every point of price comes straight out of a margin that was only 45.3 per cent of list to begin with. Over the year the account's structural adhesives sit 41,912 below list.
One point of off-invoice leakage on this account costs 1.29 a unit, or 1,523.80 a year. One more point of negotiated discount costs 1.26 of contribution a unit (the 1.29 off the pocket price, less the 0.03 of commission it saves), or 1,489.19 a year. Small points on a waterfall are not small on a contribution line.
The same account, moving one block of the waterfall at a time.
| Negotiated discount | Invoice | Pocket, % of list | Contribution | % of list contribution | |
|---|---|---|---|---|---|
| 0.00% | 139.12 | 121.31 | 82.0% | 40.53 | 60.5% |
| 6.82% | 129.03 | 112.51 | 76.0% | 31.93 | 47.6% |
| 11.00% | 122.84 | 107.12 | 72.4% | 26.66 | 39.8% |
| 14.30% | 117.96 | 102.86 | 69.5% | 22.50 | 33.6% |
| Off-invoice, % of invoice | Contribution a unit | Contribution a year | |
|---|---|---|---|
| 0.0% | 129.03 | 48.45 | 57,214.57 |
| 8.0% | 118.70 | 38.12 | 45,024.16 |
| 12.8% | 112.51 | 31.93 | 37,709.91 |
| 16.0% | 108.38 | 27.80 | 32,833.75 |
Even with no negotiated discount at all, the order-size discount and the off-invoice stack leave the account at 82.0 per cent of list. The off-invoice block is the one nobody negotiates in the room, and it is worth more contribution than the negotiated discount on this family.
The free workbook for this case, on the Pricing Strategy companion page, builds this cascade for all 180 accounts and three families, so a change to one negotiated rate moves the company total. Two off-invoice lines deserve their own test: whether the cash discount is worth what it costs, worked in is a 2/10 net 60 discount worth taking, and how much of a price increase distributors claw back by buying early, in how much of a price increase forward buying takes back.
Invoice price is list less the discounts printed on the invoice. Pocket price also deducts everything paid afterwards: volume rebates, cash discounts, freight and marketing allowances, returns credits and promotions. In the worked case the invoice is 129.03 and the pocket price 112.51, so 16.52 a unit, or 12.8 per cent of invoice, leaves through deductions that never appear on the invoice.
On invoice price, because rebates, allowances and cash discounts are paid on what was billed. Applying a 12.8 per cent off-invoice stack to a 148.00 list instead of a 129.03 invoice deducts 18.94 instead of 16.52 and understates pocket price by 2.43 a unit. Follow the base each contract names.
More than the price it takes. At list the unit would carry 67.04 of contribution after a 78.00 variable cost and 2 per cent commission. At a pocket price of 112.51 it carries 31.93, so 24.0 points off the price removes 52.4 per cent of the contribution.
This article is one calculation from Pricing Strategy. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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