What is a pricing waterfall?<\/h2>\n\n\n\n![\"pricing](\"https:\/\/lh7-us.googleusercontent.com\/docsz\/AD_4nXdjAQ6PnOlX6NjD1GVcekgmaC3m0sazLkM3HYA_0HubtmUVecMEsgmKJ4eeHjHIGI55mhFWc5K_wjSkkFZCrgW729n-BbQgeQXnfFVclieMsBjprhZwL0r2ttFixUVaK0-uNoDldXHrPWjlZJA14WW8Ezph?key=k7XNhDONPzQS7MjFBFv1xg\")
Image created by the author <\/figcaption><\/figure><\/div>\n\n\n\nA pricing waterfall, also known as waterfall pricing, is a method used to identify hidden costs and revenue leakage by breaking down the costs and discounts associated with any given product. It\u2019s also a pricing method used to encourage bulk purchasing.<\/p>\n\n\n\n
Common examples of this are \u201c3 for 2\u201d offers: a single tin of soup might cost $4, but 3 tins of soup bought together would cost $8, bringing the total price for each tin to $2.66.<\/p>\n\n\n\n
For SaaS and other subscription-based industries, waterfall pricing is useful for showing how bookings turn into revenue \u2013 something that isn\u2019t always immediately clear from signups alone. Waterfall pricing takes everything into account, including upgrades, renewals, SaaS marketing budgets<\/a>, SaaS support costs, and free trials. Ultimately, it produces a running total that clarifies ongoing profits.<\/p>\n\n\n\nHaving entered all relevant costs and discounts into a pricing waterfall, businesses can identify where discounts can (and should) be applied to encourage more purchasing. In the case of bulk purchasing, a pricing waterfall will show how many units the brand should sell before discounts are applied, and how much discount they can afford to apply.<\/p>\n\n\n\n
As a general rule, a pricing waterfall comprises several major elements:<\/p>\n\n\n\n
- The list price<\/strong>: This is the selling price set for a product.<\/li>
- On-invoice discount<\/strong>: This is a discount set by retailers to increase sales of the product. This discount is shown on the invoice (for example, the customer will get a receipt displaying the list price, the discount, and the final discounted total).<\/li>
- Off-invoice discount<\/strong>: These are discounts that aren\u2019t shown on the invoice but that nonetheless decrease the price of the product. For example, advertising rebates or reduced transport costs.<\/li>
- COGS (Cost Of Goods Sold)<\/strong>: The production costs associated with a product.<\/li>
- Pocket margin<\/strong>: The amount of revenue that comes to the seller after all discounts are deducted.<\/li><\/ul>\n\n\n\n
What are the benefits of waterfall pricing?<\/h2>\n\n\n\n![\"pocket](\"https:\/\/lh7-us.googleusercontent.com\/docsz\/AD_4nXeXNz5ohHziJfZbloLwI_j9_Qo2JYfoj3mwvJFdJhpfynMn7caR0RNETqDlbP35FaIS6XcfS02Kap8NyCIQ2Pt6V_8-SV2pe1096CDC89TczFErFtSwpSdlBrlzHOSt6OyXQjH-dalFi1lpQORi7-CXPIyR?key=k7XNhDONPzQS7MjFBFv1xg\")
Free to use image sourced from Unsplash <\/figcaption><\/figure><\/div>\n\n\n\nWaterfall pricing brings a number of benefits for savvy ecommerce businesses, including:<\/p>\n\n\n\n
- Identifying market opportunities<\/strong>: A pricing waterfall helps to identify areas where you can adjust your pricing strategy for maximum impact within a particular market. For example, it can clarify which products would make good loss leaders<\/a> for a particular set of customers.<\/li>
- Learning more about your costs<\/strong>: A pricing waterfall will clarify the costs and profits involved in each sale. This helps you to work out which costs and discounts can be justified, and which you should alter.<\/li>
- Boosting profits<\/strong>: Pricing waterfalls help you to plug revenue leaks and boost your bottom line.<\/li>
- Making your operation more efficient:<\/strong> Having clarity regarding costs and revenue streams is a great way to identify and eliminate inefficiencies at every stage of your process. <\/li><\/ul>\n\n\n\n
How to use a pricing waterfall to increase ecommerce conversions<\/h2>\n\n\n\n
So, a pricing waterfall is both a good analysis tool and an excellent method for boosting your profits. But how can you use one to increase your ecommerce conversions?<\/p>\n\n\n\n
Take a look at some ideas below.<\/p>\n\n\n\n
Define which factors should influence your pricing<\/h3>\n\n\n\n
To reach the most attractive and effective price, you should first work out which factors should influence your pricing strategy.<\/p>\n\n\n\n
In ecommerce terms, relevant factors might include:<\/p>\n\n\n\n
- Production costs<\/li>
- Supply chain costs<\/li>
- Shipping costs<\/li>
- Promotions<\/li>
- Carrying costs (i.e. the cost of storing inventory)<\/li>
- Marketing allowances<\/li><\/ul>\n\n\n\n
Having decided on the factors that most influence your pricing, you can get to work building a comprehensive price waterfall that will clearly show you where you can apply discounts for maximum customer benefit.<\/p>\n\n\n\n
![\"market](\"https:\/\/lh7-us.googleusercontent.com\/docsz\/AD_4nXd97yBRvlCXIqS95SDE5RuT3SHzlZQYb48ZlaPgZFf7QB_1dHNso8Hkmi7s4JwNbJHzjzQvqZleFwxOziOzBkSpfkKWNOUobQup7Y9C4rAZn4M2kbtcWAKNJPoIRqI6ynufziBPLLIjTD_tP-CSBLjZcaI?key=k7XNhDONPzQS7MjFBFv1xg\")
Free to use image sourced from Unsplash <\/figcaption><\/figure><\/div>\n\n\n\nBuild a competitive pricing strategy<\/h3>\n\n\n\n
Having built your pricing waterfall, it\u2019s always tempting to go straight for the obvious discounts and cost cuts. But wait! Before you start restructuring your pricing, conduct a competitor analysis. You don\u2019t want to build an entirely new pricing strategy only to discover that your competitors are already doing something identical \u2013 and doing it better than you.<\/p>\n\n\n\n
So, investigate your major competitors. Look at how they price their products and where they bring in the most revenue. Look at their discounts and offers. Then, use what you\u2019ve learned to do something better and more effective than what they\u2019re doing.<\/p>\n\n\n\n
For instance, examining how Amazon<\/a> utilizes its dynamic pricing model to optimize sales during high-demand periods could provide valuable insights into creating a robust pricing strategy.<\/p>\n\n\n\nRemember, some types of business will have more obvious pricing waterfalls than others. For example, performing a successful SaaS competitive analysis<\/a> may be harder than performing a retail competitor analysis, because SaaS competitors won\u2019t necessarily be bringing in new, paying customers immediately. Instead, they will use strategies like offering free trials and upgrades that translate into revenue further down the line. <\/p>\n\n\n\nSo, rather than focusing on their pricing, look instead at their marketing strategies and the lead magnets they use to pull in new customers. This could reveal areas where they\u2019re applying discounts and areas where they\u2019re driving revenue. You can then use this knowledge to create a more attractive and competitive pricing waterfall for your own offering.<\/p>\n\n\n\n
Identify beneficial discounts<\/h3>\n\n\n\n
Waterfall pricing can be a huge help in identifying where you can apply discounts that are attractive to customers and beneficial to your business.<\/p>\n\n\n\n
For example, a pricing waterfall could show you that offering free shipping on orders under a certain price will impact your profits, but free shipping on orders over a certain amount is affordable. <\/p>\n\n\n\n
Bringing in this shipping discount will not only be attractive to customers, but it may also encourage them to increase the size of their orders. Sure, you\u2019ll have to absorb a few extra shipping costs, but this is usually worth it for the extra revenue that increased order sizes bring in.<\/p>\n\n\n\n
Use savings to boost your sales and marketing efforts<\/h3>\n\n\n\n![\"ecommerce](\"https:\/\/lh7-us.googleusercontent.com\/docsz\/AD_4nXdNny9jNTauC2ZbkhAxjPzqKrEZPMElzKCIgvazT4peXkdpwpfMCoAMDWdireBM12GTvwWWUrMNrW7WkxOWPPTLlOY6UVV7-ynfkq_27pMbabL5ygWukX_yTFrtebktH8NBblPEmoZbCAwvAhTD9aMOdu8?key=k7XNhDONPzQS7MjFBFv1xg\")
Free to use image sourced from Unsplash <\/figcaption><\/figure><\/div>\n\n\n\nPricing waterfalls are often used to identify areas where costs can be cut for the customer. And that\u2019s great! You can and should use your pricing waterfalls to identify potential discounts for customers. But that\u2019s not all you can do with the savings and financial clarity that pricing waterfalls can bring you.<\/p>\n\n\n\n
A pricing waterfall, also known as waterfall pricing, is a method used to identify hidden costs and revenue leakage by breaking down the costs and discounts associated with any given product. It\u2019s also a pricing method used to encourage bulk purchasing.<\/p>\n\n\n\n
Common examples of this are \u201c3 for 2\u201d offers: a single tin of soup might cost $4, but 3 tins of soup bought together would cost $8, bringing the total price for each tin to $2.66.<\/p>\n\n\n\n
For SaaS and other subscription-based industries, waterfall pricing is useful for showing how bookings turn into revenue \u2013 something that isn\u2019t always immediately clear from signups alone. Waterfall pricing takes everything into account, including upgrades, renewals, SaaS marketing budgets<\/a>, SaaS support costs, and free trials. Ultimately, it produces a running total that clarifies ongoing profits.<\/p>\n\n\n\n Having entered all relevant costs and discounts into a pricing waterfall, businesses can identify where discounts can (and should) be applied to encourage more purchasing. In the case of bulk purchasing, a pricing waterfall will show how many units the brand should sell before discounts are applied, and how much discount they can afford to apply.<\/p>\n\n\n\n As a general rule, a pricing waterfall comprises several major elements:<\/p>\n\n\n\n Waterfall pricing brings a number of benefits for savvy ecommerce businesses, including:<\/p>\n\n\n\n So, a pricing waterfall is both a good analysis tool and an excellent method for boosting your profits. But how can you use one to increase your ecommerce conversions?<\/p>\n\n\n\n Take a look at some ideas below.<\/p>\n\n\n\n To reach the most attractive and effective price, you should first work out which factors should influence your pricing strategy.<\/p>\n\n\n\n In ecommerce terms, relevant factors might include:<\/p>\n\n\n\n Having decided on the factors that most influence your pricing, you can get to work building a comprehensive price waterfall that will clearly show you where you can apply discounts for maximum customer benefit.<\/p>\n\n\n\n Having built your pricing waterfall, it\u2019s always tempting to go straight for the obvious discounts and cost cuts. But wait! Before you start restructuring your pricing, conduct a competitor analysis. You don\u2019t want to build an entirely new pricing strategy only to discover that your competitors are already doing something identical \u2013 and doing it better than you.<\/p>\n\n\n\n So, investigate your major competitors. Look at how they price their products and where they bring in the most revenue. Look at their discounts and offers. Then, use what you\u2019ve learned to do something better and more effective than what they\u2019re doing.<\/p>\n\n\n\n For instance, examining how Amazon<\/a> utilizes its dynamic pricing model to optimize sales during high-demand periods could provide valuable insights into creating a robust pricing strategy.<\/p>\n\n\n\n Remember, some types of business will have more obvious pricing waterfalls than others. For example, performing a successful SaaS competitive analysis<\/a> may be harder than performing a retail competitor analysis, because SaaS competitors won\u2019t necessarily be bringing in new, paying customers immediately. Instead, they will use strategies like offering free trials and upgrades that translate into revenue further down the line. <\/p>\n\n\n\n So, rather than focusing on their pricing, look instead at their marketing strategies and the lead magnets they use to pull in new customers. This could reveal areas where they\u2019re applying discounts and areas where they\u2019re driving revenue. You can then use this knowledge to create a more attractive and competitive pricing waterfall for your own offering.<\/p>\n\n\n\n Waterfall pricing can be a huge help in identifying where you can apply discounts that are attractive to customers and beneficial to your business.<\/p>\n\n\n\n For example, a pricing waterfall could show you that offering free shipping on orders under a certain price will impact your profits, but free shipping on orders over a certain amount is affordable. <\/p>\n\n\n\n Bringing in this shipping discount will not only be attractive to customers, but it may also encourage them to increase the size of their orders. Sure, you\u2019ll have to absorb a few extra shipping costs, but this is usually worth it for the extra revenue that increased order sizes bring in.<\/p>\n\n\n\n Pricing waterfalls are often used to identify areas where costs can be cut for the customer. And that\u2019s great! You can and should use your pricing waterfalls to identify potential discounts for customers. But that\u2019s not all you can do with the savings and financial clarity that pricing waterfalls can bring you.<\/p>\n\n\n\nWhat are the benefits of waterfall pricing?<\/h2>\n\n\n\n
How to use a pricing waterfall to increase ecommerce conversions<\/h2>\n\n\n\n
Define which factors should influence your pricing<\/h3>\n\n\n\n
Build a competitive pricing strategy<\/h3>\n\n\n\n
Identify beneficial discounts<\/h3>\n\n\n\n
Use savings to boost your sales and marketing efforts<\/h3>\n\n\n\n