Tools › Finance and Business › Pricing › Pricing Waterfall › Example
Marn and Rosiello's Castle Battery Power-Lite: pocket price waterfall, pocket discount and profit levers
| Tool | Pricing Waterfall |
| Source | Marn, M. V., and Rosiello, R. L. (1992). "Managing Price, Gaining Profit." Harvard Business Review, Vol. 70, No. 5, pp. 84–94. Exhibits 1 and 4 (Castle Battery Company case). |
| Level | Professional |
Problem
Castle Battery sells its Power-Lite battery to an auto parts retailer from a base price of $28.40. On the invoice it deducts a standard dealer/distributor discount of $4.26, an order-size discount of $0.71 and a negotiated exception discount of $2.27; off the invoice it allows a 1.2 % cash discount, carries extended receivables at $0.22, pays $0.85 of co-op advertising, a $0.60 merchandising allowance, a $0.74 annual volume rebate and $0.32 of freight. Find the invoice price, the pocket price, the pocket discount as a percent of base price and the off-invoice leakage as a percent of invoice; with an illustrative cost of goods of $13.50, variable cost of sales $1.20, 100,000 units and $220,000 of fixed costs, find the pocket margin and the operating-profit change per 1 % improvement in price, variable cost, volume and fixed cost beside the article's Compustat averages.
Inputs to Enter
- Pocket price waterfall (default): list price 28.40; elements 'Standard dealer and distributor discount | 4.26 | on', 'Order-size discount | 0.71 | on', 'Exception discount | 2.27 | on', 'Cash discount | 1.2% | invoice | off', 'Receivables carrying cost | 0.22 | off', 'Co-op advertising | 0.85 | off', 'Merchandising allowance | 0.60 | off', 'Annual volume rebate | 0.74 | off', 'Freight | 0.32 | off'
- Cost of goods 13.50, variable cost of sales 1.20, volume 100,000, fixed costs 220,000, price change −5 % (illustrative); the 24-account transaction set and the floor of 65 % of list are illustrative
Answers
- Invoice price 28.40 − 7.24 = 21.16 (book 21.16); pocket price 21.16 − 2.984 = 18.18 (book 18.18, the cash discount printed as 0.25 against 0.254 from 1.2 %)
- Pocket discount 10.22 = 36.0 % of base price (book 10.22, 36 %); off-invoice leakage 14.1 % of invoice (book 'a full 14 % less than invoice')
- Pocket margin 18.18 − 14.70 = 3.48 per unit, 19.1 % of pocket price (illustrative costs)
- Operating profit 127,608 = 7.0 % of revenue; levers per 1 %: price 14.2 %, variable cost 11.5 %, volume 2.7 %, fixed cost 1.7 % (book: Castle 14 % for price at a 7 % return on sales; Compustat averages 11.1 / 7.8 / 3.3 / 2.3 %)
- Break-even volume change for a 5 % price cut at a 19.1 % margin: +35.4 %; band of the illustrative transactions 14.95 to 23.07 (35.2 % wide), weighted mean 20.32, Pearson r 0.40 (p 0.052, not significant)
Notes
The tool's default inputs are this case; press Submit. The article's waterfall values are reproduced exactly from the elements as printed (test_pricing_waterfall.php); the cost, income statement and transaction set are illustrative because the article gives none. Exhibit 2 (flooring: 6.00 → 5.78 → 4.47) and Exhibit 6 (Tech-Craft: 100 → 83.3 → 60.9 %) follow by replacing the elements.