Gross-to-Net and the Value Split
Three retailers buy the same unit at the same $2.80 list price. One pays you $2.32, one $2.10, one $1.97.
In Lesson 1 you classified the money. Now you watch it move, one unit at a time. A shopper pays $4.50 at the till for the household‑care pack you graded at $33.60 a case in Lesson 1, and this lesson works that same case divided by its 12 units: a $2.80 list price per unit.
Walk the chain once for the whole customer base. Of the $4.50, sales tax takes $0.75 and the retailer's own markup takes $0.95 before the money reaches your top line. From your $2.80 list, the on‑invoice zone takes $0.22 (about 7.9% of list) down to a $2.58 invoice price, and the off‑invoice zone takes $0.42 more (15% of list) down to a $2.16 pocket price. That is the same 22.9% gross‑to‑net rate you graded in Lesson 1. Making and moving the unit costs $1.67, which leaves $0.49 of gross profit.
But the blended walk hides the real story. MegaMart nets to a $2.10 pocket, ValuePlus to $1.97, OnlineFirst to $2.32, the same product at the same list. The research that founded transaction pricing (Marn and Rosiello) measured pocket‑price bands of 35% up to 500% across five industries: the same SKU, sold on different terms to different customers. In the best‑known case, a battery maker published under the disguised name Castle Battery, the team went after the band deal by deal: average pocket price up 3%, volume flat, operating profit up 42%.
One more thing the averages hide: your blended realization has drifted about half a point a year for five years. Nobody decided that. It is what trade terms do when nobody owns the number.
The pocket-price rail. Every customer's marker is where the same $2.80 list price actually lands after their terms; the diamond is the blended average at $2.16. The rail's zones are the realization bands: keep more than 70% of list and you are in the healthy band, below 60% is critical. The spread between the highest and lowest pocket is the band the rest of this lesson teaches you to read, defend, and narrow.
One List Price, Many Pocket Prices
The waterfall hangs on three fixed anchors: Gross Sales (your list price), Net Invoice Value (the invoice price), and Net Sales (the pocket price you keep). Between them sit the two zones where your trade terms net the list down. Run that walk per customer and the single G2N ratio becomes a band of pocket prices, because every customer's stack of families and placements is different. The band, not the average, is where the money hides.
Two habits separate senior operators here. First, they read the band before the average: narrowing the pocket-price spread usually beats raising list price, because it is invisible to shoppers and lands straight on profit (the Castle Battery benchmark: pocket up 3%, volume flat, operating profit up 42%). Second, they read realization over time: a customer base that keeps 77% of list today and loses half a point a year is repricing itself downward without a single decision being taken. This lesson gives you both reads on one screen.
What you'll take away
One list price becomes many pocket prices. Every customer's terms stack nets the same $2.80 list down to a different pocket, and reading that spread is the first skill of this lesson.
Placement is a tag. Moving a family between on‑invoice and off‑invoice reshuffles the invoice price and the retailer's front and back margin. The pocket price does not move.
Realization mirrors G2N. Keep more than 70% of list and the read is HEALTHY; the realization bands are the gross‑to‑net bands read from the other end of the same ruler.
Scale it before you judge it. A cent per unit reads as noise. At 3.6 million units it is $36K a year, and one point of realization is about $101K.
Watch the drift. Realization erodes roughly half a point a year when nobody owns it. The erosion chart is the only place in this module where the lesson shows you time.
Master these gross-to-net concepts before opening the sandbox
13 concepts- Purpose
- Put three real customers side by side and watch the same national list price net down to three different pocket prices. See how each customer's mix of families and placements creates that spread, how the blended average rolls up, and what one point of realization is worth in annual dollars.
- How to use
- Pick a customer, set its seven family sliders and placements, then read the rail, the sentinels, and the waterfall together. The national list and annual volume levers sit below the families.
- What to watch
- The pocket-price rail is the headline: markers are customers, zones are the realization bands, the diamond is the blended average across all customers. The sentinels grade the selected customer; the blended tiles grade the whole customer base.
MegaMart's trade termsby family, in % of list
The six families plus the governed Other, for this customer only. Lesson 1 taught what each family buys; here you set how deep each one runs, then open Set placement to choose where it sits.
the cost of being in the channel
pay for behavior that cuts cost to serve or improves cash
pay for a delivered outcome
fund the retailer's price event
fund shopper-facing activity that is not a price event
data and joint-planning money
the governed residual, an audit list
Anchor 1 for every customer. The case equivalent is $33.60 for the case of 12 you negotiated in Lesson 1.
Scales every per-unit cent into annual dollars. Split by the fixed volume mix: 36/24/12/28.
The pocket-price rail
Every marker is a customer's pocket price for the same $2.80 list. The rail's zones are the realization bands, so a marker's color zone is its health read. The diamond is the blended average.
This customer keeps you above the 70% floor. Watch the drift, not the level.
HEALTHY above 70 · CRITICAL below 60 (% of list kept)
Most of this customer's money settles off-invoice, where it can still be tied to behavior.
FLEXIBLE below 30 · LOCKED at 50+ (% of terms on-invoice)
MegaMart's total margin sits inside the household-care corridor. Corridors differ by category, so the read travels, the numbers do not.
ALIGNED 33 to 46 (retailer margin, % of the shelf price before tax)
Percentages come from the exact terms. Dollar figures round to the cent, so a quick hand-check from the rounded dollars can read a few tenths of a point different.
MegaMart in annual dollars
MegaMart takes 36% of the total 3.6M units, so every per-unit cent below scales by 1.30M. This is the table you bring to the negotiation, not the per-unit one.
| Family | % of list | $ / unit | Annual $K | Share of terms |
|---|---|---|---|---|
| Structural | 8.5% | $0.238 | $308K | 34.1% |
| Efficiency | 2.2% | $0.062 | $80K | 8.8% |
| Performance | 3.0% | $0.084 | $109K | 12.0% |
| Promotional | 8.6% | $0.241 | $312K | 34.5% |
| Shopper Activation | 1.8% | $0.050 | $65K | 7.2% |
| Partnership | 0.7% | $0.020 | $25K | 2.8% |
| Other (governed) | 0.1% | $0.003 | $4K | 0.4% |
| Total trade terms | 24.9% | $0.697 | $904K | 100.0% |
The whole customer base at these settings: $10.08M gross, $2.31M of trade terms, $7.77M pocket revenue. One point of realization here is worth about $101K a year.
MegaMart's back margin is your off-invoice zone seen from the other side of the invoice. Move a family's placement and you reshuffle front against back without changing your pocket. ValuePlus runs almost all front margin; MegaMart runs a thick back margin. Same mechanic, opposite habits.
The pool is their shelf price before tax minus your unit cost, and at a fixed shelf and cost it does not grow: every term you grant moves value across it, never into it. Across these customers the retailer holds roughly three quarters of the pool, heavier than the two-thirds shape most categories show, and that gap is the module's central repair job: terms bloat plus a thin gross margin.
Five years of realization drift (whole customer base)
The history is illustrative and the current point is live: it reads the blended average from the sandbox above. Half a point of drift a year looks like nothing until you price it: at today's volume each point is about $101K a year, for every year it persists.
Keep it hypothetical or generic. No confidential figures, no company data: a made-up scenario teaches the same lesson. When you click Analyze, the AI reads this context together with your current sandbox settings.
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The Value Split Diagnostic
You run RGM for the household-care customer base from the sandbox: one SKU at a $2.80 national list price, 3.6 million units a year, sold through MegaMart (36% of units, 24.9% all-in terms), ValuePlus (24%, 29.5%), OnlineFirst (12%, 17.0%), and a fixed other-customers line (28%, 17.2%). The blend nets $2.80 down to a $2.16 pocket. The annual Joint Business Planning round opens in six weeks, and the CFO wants the full value-split diagnostic first: where the money goes, which accounts are outliers, what one recovered point is worth, and which proposals on the table would do structural damage.
What is the customer base's annual Gross Sales, and what is the blended gross-to-net rate as a percentage of Gross Sales?
You can now read any customer's pocket price and say exactly which families and placements put it there. The next question is the harder one: who deserves what? ValuePlus keeps the deepest terms in the customer base because of history, not performance. Lesson 3 builds the customer tiering framework that replaces negotiation history with criteria, so the depth of a customer's terms follows the value they actually deliver.
Every number in this lesson lands on a P&L line. The Integrated RGM runs the full manufacturer statement, where one recovered point of realization behaves like a 1% list-price rise with none of the shelf visibility, and where the roughly 11% operating-profit power of a realized-price point (the benchmark from Pricing) gets applied to trade terms line by line.
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