What is a price waterfall?
04/26/2023 - Pricing strategy
A price waterfall is a visual analysis method used to determine the profitability of a brand or retailer’s pricing policy. It makes it possible to easily identify hidden costs in products’ manufacturing, storage and distribution processes and calculate actual revenue and profit from sales. Price waterfalls aim to optimize a pricing strategy to make it as profitable as possible and boost eCommerce’s stabilization and growth.
Price waterfalls analyze how prices evolve and transform at different levels, from when the company sets prices, to when consumers pay them. For example, a retail price may be affected by one-time offers or sales, user-exclusive discount codes, or changes to sales conditions that impact the profit margin. The final price the customer pays can be substantially lower than the stipulated price, which can cause losses.
The list of levels or conditions affecting pricing is endless and depends on each eCommerce and product category. Price waterfalls aim to visually represent all these levels, such as the list or net price, to help identify at a glance where the company is losing money. Based on this analysis, it will then be necessary to take effective action to reduce costs and improve the profit margin.
Advantages of price waterfalls
- Identifying new market opportunities and areas where sales can be increased.
- Rigorous and detailed analysis of how discounting impacts turnover and profit. Stores frequently get swept along by their competitors’ downward trend and fail to realize the impact of excessive discounting on their margins.
- Maximize profit. You can easily identify which prices are susceptible to change, and implement a dynamic pricing strategy on the best-performing categories or products.
- Better cost control of direct and indirect costs that arise from the activity.
Do price waterfalls benefit all eCommerce?
Despite the advantages, a price waterfall analysis requires businesses to commit significant time, human and financial resources. Although the return on investment will be very high, this is why it is primarily recommended to more established companies with a higher turnover, and the necessary infrastructure to bear the costs. Smaller companies or those that have yet to reach a certain degree of maturity can harness other resources to help manage their prices, such as their market positioning.
Finally, for companies both large and small, combining price waterfalls with pricing software will be the key to finishing polishing the pricing strategy and achieving prices that are efficient, attractive, and profitable. By using both resources you can set prices and then change and adapt them to market needs following an automated repricing strategy. The most advanced software already has pricing rules to determine price change limits by setting the profit margin as an indicator that is set in stone.
Category: Pricing strategy
