Pricing practitioners really have to worry about two core issues. First, how to set the price for a product or service and secondly, making sure that they realize most of that price and therefore managing effectively the margin leakage. I work with a lot of clients who have actually pretty high starting prices, but still have very small margins. So, there's a lot going on between what they would like to charge early out and then what's really left at the end of the day as profit. This is where the price and margin waterfall comes into play. It's a great tool to kind of illustrate the different margin leakage points between the starting price and the net price, and this is then called the price waterfall, and then taking it further from the net price down to the operating margin, which we call the margin waterfall. So let's look at the price waterfall in more detail. And I have to say upfront, there are many ways how to draw a price waterfall. It often differs by industry or even by company within an industry. It usually starts, however, with the global list price. From the global list price, you make adjustments if you sell internationally for different countries and for the exchange rates. This leads you to the local list price. From there, you have so-called on-invoice deductions. And they're called on-invoice deductions because they can be itemized on an invoice, and they include things like discounts, for example, for volume or for immediate payment. These are promotions and rebates. This leads you to the invoice price, which is also called the gross price. But, it doesn't stop then. There are also so-called off-invoice deductions, meaning items that affect your margin that are not really on the invoice, but you as a seller have to understand, and this could be cash discounts. It could be coop advertising or it could be buyback guarantees for wholesalers. This leads you, then, to your net price, and the net price is also then the starting point for the margin waterfall. So, the margin waterfall starts where the price waterfall left off at net price. And from here, it basically describes a profit and loss statement with the cost of goods sold, the cost to serve, which then gives you the contribution margin and from there on, SG&A - sales, general and administration costs - which are split into the direct and the indirect pieces. And this brings you all the way down to the operating margin. Let me talk for a moment about full cost, since it was mentioned in other videos. If you draw the margin waterfall on a dollar per unit basis, you just add up all the different cost blocks and that gives you your full cost per unit. Also, since it's a good point to describe the difference between fixed and variable cost, in your margin waterfall you have fixed portions and variable portions of cost in every cost bucket and the structure depends on the item. So, maybe on the cost of goods sold you have more variable and less fixed, and in the SG&A you have mostly fixed cost. A couple of closing thoughts. The price and margin waterfall really illustrates the relationship between the price where you start and all the way down to the profit where you end up with. And it's a great tool to discuss your business with your stakeholders. The reason why it's so useful is because it allows you to nicely compare and benchmark your business internally or even externally to identify the root causes of margin leakage. Now, when you go about creating your own price margin waterfall, you will see it's often quite difficult to get the data, but do your best and keep pushing to get down all the way to profitability. The next thing you need to consider is what is the right dimension for the analysis. And, the unit of analysis can be a single product, it can be a product category, or a business segment like a channel or a single customer. On the y-axis, you can have the dollar per unit, the absolute dollars, or the percent of net sales, and each of them will probably highlight a different pattern and spark different ideas of what could be wrong and need to be fixed. Keep this point in mind when you build your own price and margin waterfall.