Revenue leakage from wrong prices

Revenue leakage from wrong prices happens when customers pay less than your pricing policy or your agreements require, without anyone having deliberately decided that they should. The causes are usually mundane: an outdated price in the item master, a manual price override on an order, a discount above the permitted maximum, or a customer price that was meant for one project and then never went away. The result is that the same product leaves the building at widely different prices, and nobody can explain why.

Price leakage is treacherous because every individual invoice looks normal. Only when you put prices per customer and per product side by side does the spread become visible. Below: where wrong prices come from, how to find them and how to stop them coming back. For the full picture, see the complete guide to revenue leakage.

Where do wrong prices come from?

The item master lags behind

The price list is updated in the quoting tool or in a sales spreadsheet. The item master in the billing system, whether that is Exact, AFAS, SAP, NetSuite or Dynamics, is updated late or not at all. Orders created directly in the billing system pick up the old price. This is most common in wholesale, distribution and companies with a large product range.

Manual price overrides

An order entry clerk changes the price on an order by hand, for example because the customer rings up and says they paid less last time. No approval is required and no reason is recorded. The overridden price is then copied onto the next order.

Discounts above policy

A salesperson gives 25 percent off to close a deal at the end of the quarter, while the maximum is 15 percent. There is no approval step in the CRM, or it can be bypassed by entering the discount as a lower unit price rather than as a discount.

Discounts that never stop

An introductory discount, a promotional discount or a goodwill credit after a complaint is set up as a standing discount on the customer. The end date is in an email or in the contract, not in the system. The discount keeps running. This is covered from the contract side in revenue leakage between contract and invoice.

Project prices that stick

A customer gets a sharp price for a large one-off project. That price is set as the customer price in the billing system and from then on applies to every order, including the small ones the discount was never intended for.

Hidden discounts through the back door

Not every price reduction is a lower price. Free delivery above a threshold that was never agreed, extended payment terms without interest, a year-end rebate calculated more generously than the agreement says. What matters is what the customer ultimately pays, not the price on the invoice line.

Prices that do not move

Your purchase prices or labour costs go up, your list price does not. Or your list price does, but a large share of your customers are on customer-specific prices that were never adjusted. This overlaps with missed indexation, covered in revenue leakage from missed price indexation.

From list price to what you actually receive

A useful model is the price waterfall. You start with the list price and subtract everything that reduces what the customer eventually pays:

1. List price.
2. Less the standard customer discount.
3. Less the deal discount.
4. Less the order discount or manual override.
5. Less the costs you do not pass on, such as delivery.
6. Less the early payment discount or extended payment terms.
7. Less the year-end or volume rebate.
8. Equals what you actually receive.

Each step on its own is small and often defensible. Together they can make the gap between list price and realised price much larger than anyone intended. Price leakage sits in the steps nobody approved, or in the ones that ran longer than intended.

Worked example

Worked example: suppose a technical wholesaler with EUR 12 million in revenue sells a product with a list price of EUR 100. The pricing policy allows a maximum customer discount of 20 percent, so a floor price of EUR 80.

An analysis of the past year shows:

• 70 percent of volume is sold between EUR 80 and EUR 100. Within policy.
• 25 percent is sold between EUR 72 and EUR 80, at an average of EUR 76. Below policy, with no recorded approval.
• 5 percent is sold below EUR 72, at an average of EUR 68, mostly through manual overrides on orders.

Suppose this product generates EUR 1.5 million in revenue across 18,000 units. Then:

• 4,500 units at an average of EUR 4 below the floor price: EUR 18,000.
• 900 units at an average of EUR 12 below the floor price: EUR 10,800.
• Together: EUR 28,800 a year, for this one product alone, counted only up to the floor price.

The real leak may be larger, because discounts within policy are not always justified either. The figures are assumptions for the purpose of the example.

How do you find wrong prices?

1. Compare the item master with the price list

Export the current price list and the prices in the billing system's item master. Every difference is a risk for every order entered against that item.

2. Build a price distribution per product

Take all invoice lines for each product over the past year and calculate the realised price per unit. Build a distribution: how much volume at which price? A wide spread with no clear cause is a signal.

3. Compare customers side by side

Compare what similar customers pay for the same product. Customers with the same volume and the same profile who pay very different prices deserve a closer look.

4. Look for manual overrides

Most billing systems record whether a price was changed by hand relative to the standard price. Filter on that and look at frequency, size and who makes them.

5. Check discounts against policy

Put every discount in won deals and on invoices next to your discount policy. Flag everything above the maximum without a recorded approval.

6. Check end dates

List all active discounts and find the agreement behind each one. Is there an end date, and has it passed?

How do you prevent it?

One source for prices. The price list lives in one place and is pushed from there to the quoting tool, the CRM and the billing system. No parallel spreadsheets.

Approval above a threshold. Discounts above the standard maximum require approval, in the system, with a reason. A CPQ tool or an approval step in the CRM can enforce this.

Manual overrides with a reason. An order entry clerk may change the price, but only with a mandatory reason. That way you can see afterwards why it happened.

An end date on every temporary discount. No temporary discount without an end date in the system.

A periodic price distribution review. Review the spread per product group every quarter. It takes a few hours and shows immediately where things are getting out of hand.

Sales commission on margin, not only on revenue. If salespeople are rewarded only on revenue, giving discounts is a rational choice.

One of the eight leak patterns AutoMaat describes is exactly this: discounts nobody approved and prices that never moved. It is on the use cases page.

Checklist

• Does the price in the item master match the current price list?
• Do you know, per product, how wide the spread in realised selling price is?
• Do discounts above the maximum require approval, and is that approval recorded?
• Are manual price overrides logged with a reason?
• Does every temporary discount have an end date in the system?
• Are project prices limited to the project they were agreed for?
• Are salespeople also rewarded on margin, not only on revenue?

Frequently asked questions

Is every discount above policy a leak?

Not necessarily. Sometimes there is a sound commercial reason. It becomes a leak when nobody consciously approved the deviation, or when the reason stopped applying long ago.

How do I spot wrong prices without checking everything?

Start with a price distribution per product for your twenty best-selling products. A wide spread without explanation points straight to where you should look further.

What if customers are used to a price that is too low?

Then it is mainly a commercial question. A gradual correction at the next renewal or price round is often achievable. More important is that no new deviations arise.

Does a CPQ tool help against price leakage?

A CPQ tool helps with accurate quotes and discount approval. It does not check whether the agreed price is also invoiced correctly. For that you need to keep comparing quote, deal and invoice.