Price realization

What is price realization?

Price realization is the share of list price a company collects after discounts, rebates and other concessions. A realization of 88 percent means the company keeps 88 cents of each list-price dollar. Some of the gap shows on the invoice; some does not, such as free extra visits, extended payment terms or waived fees. Marn and Rosiello's pocket price waterfall, published in Harvard Business Review in 1992, traces that erosion from list price to the pocket price the seller keeps. The part given away beyond what was needed to win the business is often called discount leakage.

Why it matters to a revenue leader

Price is the most direct path to profit a revenue leader controls. McKinsey's analysis of the average S&P 1500 income statement found that a 1 percent price increase, with volume unchanged, would lift operating profit by about 8 percent. Leakage is hard to see because each concession looks small and reasonable at the time. Across hundreds of service agreements it adds up, and it trains customers to expect a discount at every renewal. In PE-backed services companies, pricing is a common early lever in a value creation plan, because realization can differ widely between branches and sellers selling the same work.

How to calculate it

A testing and inspection firm lists an annual backflow test at $250. Across 2,000 tests last year it collected $430,000, an average of $215 per test. Price realization is 86 percent, and one branch averaged $190, or 76 percent. Most of that branch's discounts went to customers who had no competing quote.