How to Eliminate Currency Impact from Pricing Analyses

Currencies have been especially volatile over the past two years. While most everyone is aware of the effect currency movement can have on pricing, many organizations struggle to eliminate this effect from their pricing analyses. Many times this is due to commercial teams relying on monthly PivotTable extracts that financial resources pull from ERP systems. Built to satisfy a wide audience, these files generally cater to the masses by providing global data all in USD, in part so global leaders can see roll-ups of regional performance.
Using this data for detailed pricing analytics can lead to problems as evidenced in this example below:


Looking at the year-to-date performance of this customer / product’s price and margin, we see a gradual reduction in price and margin over time. Assuming this customer is priced in euro however; by bringing in the exchange rates finance used to translate data in USD we see a different picture.


In euro we see that pricing and margins have been much more stable, and in fact higher pricing has allowed margin to remain the same. While U.S. based companies or companies with USD-based raw materials might have a problem with USD margins falling regardless of invoice currency, it’s important to remember that for this customer, pricing has increased YTD and further increases may meet a higher level of resistance.

To get around this problem we recommend that organizations produce two waterfalls – one in USD and the other in invoice currency. Having both sets of data available allows users to simply toggle between the two for different analyses, as some analyses like Negative Margin Analysis or Price/Margin Outlier Analysis might be best run globally using a single currency, while others that are more customer-focused are best run in that individual customer’s invoicing currency.

Getting Over Not Having Tech Service Costs in Your Waterfall

Whenever we run a requirements gathering session, one of the first questions we ask is What cost elements would you like to see in your price/margin waterfall that are not included in current margin reports today? Without fail, technical service costs are always the first response. The allure of having these costs in the waterfall is pretty clear, as companies would love to see which customers are consuming the most services and how much these costs reduce profit on those accounts.

The problem is that unless companies are willing to have their technical service resources enter their hours weekly into a time & expense system, there is simply no way to accurately allocate these costs back to specific customers instead of simply using a peanut butter approach (spreading the costs evenly by volume, revenue, etc). Since the thought of having resources enter their time weekly is not appetizing to pretty much every customer, we recommend moving forward with a very simple approach.

Whenever we sit down with a technical service manager, plant manager, or other sales support personnel we ask them to make a list of the Top 10 or Top 20 customers that they seem to spend the most time and resources on (i.e. Which customers require the most on-site support, extra testing, special labeling, packaging, product returns, etc?). We then take this list and calculate the current profitability level for each account (not including service costs).


For customers on the list with low overall or low % margin, a company can then decide whether to stop providing these services, charge for the services, or raise pricing to bring margins up to an acceptable level given the “neediness” of the customer. In the example above, Ted’s Contracting and DC Distribution appear to be consuming a large amount of services given their size and overall profitability.

This process is by no means perfect, but it is a simple way to ensure companies are dedicating services to the right customers instead of spending money on customers that deliver less value to their account portfolio. For more tips on the challenges of properly allocating costs to serve back to customers, please contact us anytime.

Waterfall Design: Where to Begin?

When designing a price/margin waterfall one of the first major design decisions you’ll face is deciding where to begin your waterfall. For many companies this means list price, for others a “base price” or “gross price” is a more appropriate starting point. Even if list pricing is available it might not be an appropriate starting point, as there are several issues that come into play. There are a few simple questions companies can answer to help them determine if starting with list price is right for them.

Are list prices maintained for all products?
Having list prices available for some but not all products creates a number of headaches. In addition to having to decide how to populate the list price bucket for products with no list prices in place, you now have two different starting points in your waterfall as some start with list and others start with base price. Organizational change is hard enough – unless list price data is especially meaningful for the subset of data with list pricing in place it might be best to have all waterfalls begin at the same point to minimize confusion for new users.

If list prices are maintained – are they real?When companies announce 2-5% or 5-10% price increases, list prices are usually raised the full 5% or 10% respectively. Repeat this twice a year for a few years and you soon have list prices entering a new stratosphere from actual customer pricing. If list prices are more than 2x your average price, it’s best to begin with a more realistic price point as you don’t want to lose credibility with your first waterfall bucket.

Is anyone actually paying list?
If you do have small customers or distribution partners paying list or a standard discount from list, you will probably want to run some form of analytics to ensure prices are moving with list accordingly. In this case including list pricing in the waterfall might be important.

One final thought to remember is that your price/margin waterfall data can be different from your price/margin waterfall analytical graph. If list pricing is important for some business but a distraction to other segments, you can always include list price in your actual data so users have access to it if needed, but begin your waterfall chart with base price as to not cloud the data for other users.

For more information on waterfall development please visit or White Papers section for more detail or contact us anytime.

Price / Margin Waterfalls: A Basic Introduction

I can’t think of a better topic for our first blog entry than a basic introduction to a standard Price / Margin Waterfall – the foundation for pricing analytics. Beginning with revenue and ending with profit, a waterfall is simply an income statement in graphical form designed to highlight “leakage” cost buckets (Freight, Logistics, etc) and their impacts on profitability. Cost buckets are separated by anchors (Base Price, Invoice Price, etc) that serve as intermediate points on the waterfall and are frequently used in various pricing analytics.

Waterfall designs will vary by industry but all feature some common elements. The first waterfall elements on the left are derived from an organization’s pricing setup. A common setup begins with a customer’s Base Price and then adds various on and off-invoice surcharges until reaching the Invoice Price a customer actually sees on an invoice. Another option is to begin with List Price, but that’s a complicated decision we’ll break down in the future. Breaking down the revenue data into several buckets and anchors instead of beginning simply with Invoice Price has several advantages, just one of which is allowing you to differentiate between changes in base price vs. changes in surcharges.

Following Invoice Price, cost to serve buckets such as sales adjustments, rebates, cash discounts, commissions, and customer freight are subtracted from Invoice Price to reach what many companies refer to as “Pocket Price” (i.e. the amount of cash placed in your metaphorical “pocket” after certain costs are paid). Many companies begin the waterfall design process with several of these cost buckets already being calculated in existing margin reports and simply have to add 2-3 new elements. It’s important to include as many costs as possible to give you the most accurate picture of your true profitability – but some constraint must be shown to avoid adding too many waterfall elements or trying to add costs that are impossible to allocate back to specific sales.

Some organizations will stop at Pocket Price for fear of exposing sensitive cost of goods sold (COGS) data, but in most cases COGS buckets are subtracted to reach a final Gross Margin anchor – representing the final profit you make after all costs are considered.

We’ll get into much more detail on the importance on designing a proper waterfall later, but for now that’s your basic introduction to price / margin waterfalls. In the meantime for more information contact us at info@nextlevelpricing.com.