Pricing

Pricing Waterfalls 101

By Colin Carroll
May 26, 2011

While catching up on my reading, I came across a B2C example, created by Rags Srinivasan of Iterative Path, that helped me explain to my mother what I do all day as a pricing business consultant.  Even our mothers have occasional waterfall encounters, and mine likes JCPenney – so Rags’ JCPenney waterfall chart is especially useful.

waterfall_small

Let’s walk through it.

 List Price: All good waterfalls begin with a list price. List prices are posted and public, but not customer specific. This is where negotiation begins. List prices communicate the absolute value of a product, as well as relationships between related products. A Base Model is $20k, Base Model plus air conditioning lists at $21k. Relationships between related products, a base product plus adders for attributes, are an important function of list prices, messaging the relative value differentials within and across product categories.

 Discounting: List Prices are only the start of the waterfall. Negotiation comes next, a discount off of a list. At JCPenney, the discount is not negotiated, it is the function of a sale and/or promotion.

A sale price effectively lowers the invoice price, without lowering the List Price, for a given time period in an attempt to drive volume and/or share.

Next comes a coupon, effectively a targeted promotion discount. Coupons lower the net price, but not the invoice price or the list price, for certain types of customers. Perhaps only customers who subscribe to home and garden magazines. Promotions (coupons in retail) are also an effective pricing strategy for driving volume in target segments.

New credit card discount. Credit card issuance is itself a profit center for retailers, as well as helping the retailer to:

  • Gather information about their customers, helping to increase the efficacy and specificity of promotions.
  • Limit customer switching, which drives total customer lifecycle value.

Retailers have an incentive to sign you up for the credit card. Offering a point of sale discount is a cost effective way of driving these objectives.

Frequent shopper discount. JCPenney is indicating that they want to give their best prices to their best customers. They don’t want to give their biggest discounts to cherry pickers, but to loyal customers. Plus, they want to give my mother a financial incentive to become one of their best customers. Spend more, get better deals, spend even more. Waterfall 101.

  • Price Management , Price Optimization , pricing analytics , Pricing Metrics , Pricing Strategy , pricing waterfall

    Colin Carroll

    Colin Carroll has over 15 years of experience helping manufacturers implement and automate price and margin management best practices. Colin is currently a Pricing Expert at McKinsey & Co. Prior to joining McKinsey, Colin was the VP of Business Consulting at Vendavo. Before joining Vendavo, Colin was a pricing strategy consultant in addition to eight years at International Paper Company in a series of sales and marketing management positions, including Marketing Manager, Catalog Segment and Marketing Director, Publication Papers. Originally from Buffalo, New York, Colin has an MSE in Operations Research and Industrial Engineering from the University of Michigan and a BA in Mathematics from Binghamton University.