The problem isn't the discount, it's the sum of discounts
When leadership reviews prices, it discusses the discount on the invoice. That's barely the first step down. Below it sit volume rebates, credit notes, compliance bonuses, absorbed freight, early-payment discounts, returns, marketing support, and cost-to-serve that varies wildly between customers. The sum of all of that — not the visible discount — defines real profitability.
How the waterfall is built
The exercise consists of reconstructing, for every combination of customer, product, and channel, the full path from price to pocket margin. It requires joining ERP, CRM, quoting-tool, and accounting data under a single definition of each concept.
- Published list price
- On-invoice deductions: volume, contract, promotion, one-off concessions
- Off-invoice deductions: rebates, early payment, trade support, returns
- Pocket price: what actually reaches the register per unit
- Product cost and cost to serve: logistics, service, credit, and collections
- Pocket margin: the only figure worth deciding on
Dispersion is the opportunity
When pocket margin is plotted against volume per customer, the same picture almost always shows up: a scattered cloud, not a line. Small customers with better terms than large ones, strategic products sold below secondary ones, regions with policies nobody remembers approving. The dispersion band cannot be eliminated, but it can be narrowed: moving the bottom quartile toward the median is often worth more than any across-the-board list-price increase.
Without governance, the waterfall refills itself
The analysis convinces the committee, but reverses within two quarters unless three things change: who authorizes each type of deduction, which discount corridor each segment operates under, and how the sales force is paid. If the incentive is still tied to volume or gross revenue, the sales team will rebuild the leak by design.
Key takeaways
- Pocket margin, not list price, is the only valid basis for deciding.
- The dispersion between similar customers is usually worth more than a general price increase.
- Without discount corridors and aligned incentives, the leak comes back within two quarters.
NS frameworks and reference sources
- Proprietary NS framework · P2P·NS — methodological notes from the Pricing & Revenue Management practice
- NS project base: anonymized cases by sector and geography
- Open market evidence and academic literature, recalibrated with client data
- McKinsey & Company — 'The power of pricing' (pocket-price waterfall)
- Simon-Kucher & Partners — Global Pricing Study
- Nagle & Müller — The Strategy and Tactics of Pricing
This article develops proprietary NS Business Strategy frameworks, drawing on our project base and on public industry literature and studies cited above. Figures are reference ranges; each project is measured against the client's actual data.