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Pricing for Profitability – Understanding the Pocket Margin | Deloitte CFO – WSJ

Identifying and Leveraging Pocket Information

While the analytic tools exist to identify costs at a pocket level, the data is often widespread and incomplete, and frequently siloed. Sales executives typically worry about revenue and the commissions associated with it; supply-chain professionals care about containing fuel and other factors; manufacturing wants the lowest unit costs; marketing focuses on which discount campaign to offer next; and all are concerned with optimizing their particular piece of a product’s life cycle.

But to fully assess pocket costs, finance should identify the components that add or subtract value from the business on a marginal basis. Those include factors that are not part of cost of goods sold (COGS), such as expedited shipping, fixed-asset or fixed-cost productivity, the cost of capital included in payment terms, and the various discounts and promotions offered. And one effective tool to identify those factors is the price waterfall (see Figure 1). Working backwards from the list price, CFOs can use the tool to identify margin leakages and create visibility from a reference list price down to the pocket margin, including discounts, rebates and other cost elements. Moreover, the visual representation makes comparison with competitors very easy—and offers convincing proof of where price erodes in the multiple steps between making and delivering a product.

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