What is a Pocket Price?

The pocket price is the list price minus discounts, rebates, promotions, free freight, and similar offers. The contribution margin of a sale transaction can be determined by subtracting the cost of goods sold from the pocket price. For example, a business sells a product that has a list price of $100. There are associated discounts and rebates totaling $20, so the pocket price is $80. The cost of goods sold is $50. This means that the contribution margin is $30. The pocket price is an important concept, because it is the amount of a product’s price that actually “goes into the pocket” of the seller.

Characteristics of a Pocket Price

The key characteristics of a pocket price are as follows:

Net of discounts. A pocket price includes all applied discounts, such as volume discounts, early payment discounts and promotional discounts.
Adjusts for rebates and allowances. A pocket price accounts for any customer-specific rebates or allowances, such as trade allowances, loyalty program benefits, and end-of-year rebates.
Excludes hidden costs. A pocket price does not include hidden costs like shipping, handling fees, or taxes that are added separately.
Reflects true revenue. A pocket price represents the actual income earned per unit sold, offering a realistic picture of profitability.
Customer-specific. A pocket price may vary from customer to customer, based on their unique agreements, purchase volumes, or relationships with the seller.
Essential for profitability analysis. A pocket price helps companies analyze their margins at the transactional level and optimize their pricing strategies.
Dynamic in nature. A pocket price changes frequently due to promotions, market conditions, or negotiations, making it crucial to track regularly.

Example of Pocket Price

Grizzly Carts sells golf carts for very large people, and sells in bulk to distributors and country clubs. Its “Black Bear” model sells for $7,000, and can be purchased with a 10% discount if the buyer places an order for at least 10 carts at a time. In addition, Grizzly is running a Fall 5% off promotion, in order to keep its production line running during the slowest part of the year.

Based on this information, the pocket price that Grizzly will generate from each sale is calculated as follows:

$7,000 list price x 10% volume discount = $700 volume discount

$7,000 list price x 5% Fall promotion = $350 Fall discount

Pocket price = $7,000 - $700 volume discount - $350 Fall promotion

Pocket price = $5,950

In short, Grizzly’s list price of $7,000 per cart is misleading, since it only pockets $5,950 in revenues from each sale, assuming that the conditions for the discounts are met by customers.

The Pricing Waterfall

A variation on the pocket price concept is the pricing waterfall, which begins with the list price and then individually subtracts every possible deduction allowed to a customer, to arrive at the pocket price. This visual presentation is useful for understanding the size and scope of the discounts being granted to customers.