It is time to give some definitions of pricing terminologies, specifically definitions of Price Realization, Price Leakage, Pocket Price and Pricing water fall. I will explain these concepts in the B2C context (a retailer), for a B2B explanation see this. Seen above is a picture that shows the pricing for a queen mattress at a JCPenney store. The prices and discounts are taken from a store visit. (Note that I did not consider interest income earned from credit card balance.)
List Price: Price is the method to capture value added by a product. The most common way to indicate prices to customer is the list price, be it price tags in retail or invoice price in B2B transactions.
Price Leakage: Unfortunately, both in B2B and B2C scenarios, a business is unable to get the customer to pay the list price. Due to sales pressures, competitive offerings and other macro-economic factors, the prices are marked down. Different discounts applied to the list price are referred to as Price Leakage. In the figure above, price leakages are show in color red. Last week JCPenney was running a 50% off sale with an additional 15% customer appreciation coupon. On top of these if a customer were to open a store credit card they gave an additional 10% off. JCPenney is also running a frequent shopper program called JCPRewards that gives back $10 for every $250 spent.
Pocket Price: The pocket price, the price finally collected after all applicable discounts, is significantly less than the list price. This is still not profit, because it does not include sales commission (if any) and marginal cost of the item sold.
Pricing Waterfall: The picture says it all.
Price Realization: Price realization is about decreasing price leakage, increasing pocket price and hence keeping a higher proportion of the list price that flows directly to the bottom line (profit). Price realization can be in the form of higher list price, fewer discounts, additional charges or decrease in service offered (see Cadbury’s methods on this).
Effective price management is about moving away from price leakage to increasing the pocket price through price realization.
But is JCPenney leaving money on the table or is there more to this than it meets the eye?
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