From the increase the board announced to the one the invoices collected, split into rate, timing and concessions.
Price realisation is the price increase a business actually collects, as a share of the one it announced. Weight each segment's obtained rate by its revenue and by the months it applies, then deduct the concessions given to win acceptance. On an illustrative 40 million business that announced 5.0 per cent, the year collects 2.28 per cent, a realisation of 45.5 per cent: 910,000, not 2,000,000. Against 840,000 of cost inflation, the increase leaves 70,000.
Worked in full in Pricing Strategy by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Every price increase is announced at one number and collected at another. Some customers negotiate a lower rate, some win a later effective date, and some accept the rate in exchange for an allowance that takes part of it back off the invoice. The board approved 5.0 per cent; finance needs to know what arrived, and commercial teams need to know where the rest went. Both answers come from the same short calculation, done before the increase as a plan and after it as a measurement.
| Segment | Share of revenue | Rate obtained | Months at new price |
|---|---|---|---|
| Distributors | 45% | 4.0% | 9 |
| Direct industrial | 35% | 3.0% | 10 |
| Key accounts | 20% | 2.0% | 6 |
The increase was announced at 5.0 per cent from the start of the financial year. To secure acceptance, the sales team also granted new off-invoice allowances worth 0.15 per cent of revenue. Variable costs are 60 per cent of revenue and are rising by 3.5 per cent. Volume is held constant here so that the calculation isolates price; the effect of volume is a separate line in a price-volume-mix bridge.
Step 1. In-year rate by segment
Rate obtained × months at the new price / 12. Distributors: 4.0% × 9 / 12 = 3.00%. Direct: 3.0% × 10 / 12 = 2.50%. Key accounts: 2.0% × 6 / 12 = 1.00%.
Step 2. Weight by revenue
45% × 3.00 + 35% × 2.50 + 20% × 1.00 = 1.350 + 0.875 + 0.200 = 2.425 per cent. In Excel: =SUMPRODUCT(B2:B4,C2:C4,D2:D4)/12.
Step 3. Deduct the concessions
2.425 − 0.15 = 2.28 per cent collected in the year, 910,000.
Step 4. Divide by the announced rate
2.275 / 5.0 = 45.5 per cent realisation in year one. At the full-year run rate, with every segment on its new price for twelve months, the rate is 3.25 − 0.15 = 3.10 per cent, 1,240,000, a realisation of 62 per cent.
| Line | Points of revenue | Amount |
|---|---|---|
| Announced | 5.00 | 2,000,000 |
| Less: rate negotiated away | −1.75 | −700,000 |
| Less: later effective dates | −0.825 | −330,000 |
| Less: concessions off invoice | −0.15 | −60,000 |
| Collected in year one | 2.28 | 910,000 |
Most of the shortfall is negotiation, not timing: key accounts conceded 60 per cent of the announced rate and distributors 20 per cent. The timing loss is temporary and disappears in year two; the rate loss and the allowances are permanent. Set against 840,000 of extra variable cost, the business needed 2.10 per cent of price to stand still. It collected 2.28 in year one, 70,000 ahead, and will collect 3.10 at the run rate, 400,000 ahead. Had the 5.0 per cent arrived in full, it would have been 1,160,000 ahead. Customers who buy ahead at the old price take a further share that this bridge does not show; that leak is worked in how much of a price increase forward buying takes.
The plan above uses rates agreed in negotiation. The audit uses invoices. Take the products sold in both years, price this year's volume at both years' pocket prices, and divide the difference by this year's volume at last year's prices:
| Product | Price last year | Price this year | Units last year | Units this year | Price effect |
|---|---|---|---|---|---|
| A | 100.00 | 102.50 | 40,000 | 50,000 | 125,000 |
| B | 60.00 | 61.20 | 100,000 | 120,000 | 144,000 |
| C | 150.00 | 152.00 | 40,000 | 30,000 | 60,000 |
| Total | 180,000 | 200,000 | 329,000 |
Realised price = 329,000 / 16,700,000 = 1.97 per cent. Use pocket prices, after every off-invoice deduction, not list or invoice prices: an allowance granted to buy acceptance of the increase is exactly the leakage this measurement must catch. How the pocket price is built is in how to calculate pocket price from list price.
| Rate obtained | 6 months | 9 months | 12 months |
|---|---|---|---|
| 2.5% | 22 | 34 | 47 |
| 3.5% | 32 | 50 | 67 |
| 4.5% | 42 | 64 | 87 |
A three-month delay costs a quarter of whatever rate is obtained, in the first year. Holding the effective date is worth as much as a point of rate when the increase is large, which is why disciplined price increases fix one date for all customers and treat exceptions as concessions with a cost, not as administration.
Measuring realisation from average price per unit. In the product table, average price falls from 88.89 to 85.15, down 4.2 per cent, though every product's price rose. Volume shifted towards the cheapest product, B, and away from the dearest, C. That is mix, not price, and reading it as price leads to the wrong conversation with the sales team. Price realisation must be measured product by product at constant volume, as above.
The second mistake is to book the announced increase in the budget. A business that plans on 2,000,000 and collects 910,000 does not have a 1,090,000 sales problem; it has a planning convention that assumes 100 per cent realisation.
The free workbook for this case carries a price increase segment by segment with the rate obtained and the months at the new price as inputs, and returns the realised rate and the net position against cost inflation.
There is no standard, but the measure should be split before it is judged. On an illustrative 5.0 per cent increase, year-one realisation of 45.5 per cent rises to 62 per cent at the run rate once delayed effective dates have passed. The permanent losses, 1.75 points negotiated away and 0.15 of concessions, are the ones to manage.
Take products sold in both years, multiply this year's units by the change in pocket price, and divide by this year's units at last year's prices. On three illustrative products, a price effect of 329,000 over 16,700,000 gives 1.97 per cent. Never use average price per unit, which mixes price with changes in product mix.
Because volume moved towards cheaper products. In an illustrative case every product's price rose, by 1.3 to 2.5 per cent, but average price per unit fell from 88.89 to 85.15, down 4.2 per cent, because the cheapest product gained volume and the dearest lost it. That is mix, and it belongs on its own line of the bridge.
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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