What does a price waterfall consist of?
Firstly, the list price. This is the price at which it is recommended to sell a product. It can be assumed that this is the initial price after the purchase of the goods. This is the price on which the further analysis of the transformation of prices will be based.
Secondly, on-invoice deductions. These are the items that are visible to the buyer: all kinds of discounts, advertising credits, coupons, and so on. For better accuracy, each type of reduction should be analyzed separately. As you have already understood, the price waterfall consists of taking the original list price and then tracing all the changes that have occurred with that price.
Reducing the list price with on-invoice deductions results in the invoice price. This invoice price is, confusingly, referred to as a gross price or a net price in different contexts.
Next step, off-invoice deductions. These deductions are usually the main source of losses. These deductions include personnel costs, customer service costs, free samples, shipping costs, and so on. In this segment, it is easiest to miss various expenses, so here you also need to calculate each item separately.
After off-invoice deductions are accounted for, we have a net or net-net price. This is often referred to as the pocket price by pricing professionals because it is what companies actually “pocket” after all deductions are actually considered.