The price-leakage audit: why your list price went up 6% and your realised margin didn't

The price increase was real. It was announced, printed, sent and acknowledged. It just never arrived.

The 2026 price round was, by distributor standards, a success. The letters went out in December or January, the increases were between four and eight per cent depending on the category, the customers complained for a fortnight and then kept ordering. The sales team reported back that the increase "went through". The owner, who had spent November worrying about it, moved on to the next problem.

Ten months later the finance director brings the nine-month figures and the gross margin in per cent is where it was last year, or slightly below. Revenue is up, roughly in line with the increase; cost of goods is up a little more; the margin that the increase was supposed to protect has not moved. The first explanation offered is usually mix, and mix is part of it. The second is that the suppliers raised their prices too, and that is also part of it. But in most distributors the largest part is something nobody in the room can name, because nobody has measured it: the increase was announced on the list and collected on only a fraction of the invoices.

This note is about that fraction, where the rest goes, and how to find it in one day with the data you already have.

The list is not the price

In a distributor, the price a customer pays is the end of a long subtraction. It begins with the list price, which is the only number the price letter talks about. From it come the on-invoice discounts: the customer's negotiated percentage, the category discount, the quantity break. What remains is the invoice price, which is what the sales system shows and what most management reports treat as "the price".

Below the invoice, the subtraction continues, and this is the part that the price letter never touches. Year-end volume rebates and growth bonuses, paid or credited in the following year. Promotional support and marketing contributions. Free or subsidised delivery above a threshold. Extended payment terms, which are a discount paid in interest. Small-order surcharges that the sales team waives. Returns accepted outside policy and credit notes issued to close a dispute. Prices "exceptionally" matched to a competitor's quote, entered as a customer-specific net price in the system and never reviewed again. Index clauses in annual contracts that apply the increase from the contract anniversary rather than from January, which for a contract signed in June means half the year at the old price.

What is left after all of this is the pocket price: the money that actually reaches the bank for a unit sold. Measured against the list, it is the price-realisation ratio, and in a mid-market distributor it sits, in my experience, somewhere between seventy-five and ninety per cent. The distance between those two numbers is not a rounding error. It is, for most distributors, the difference between the margin the owner thinks the business makes and the one it does.

The 2026 problem is simple to state once the waterfall is in view. The increase was applied at the top of it. Most of the leaks are defined in euros or in thresholds, not in percentages, and they were not re-based when the list moved. A rebate ladder that pays two per cent above a volume of three hundred thousand euros pays out more easily once the same pallets cost six per cent more. A free-delivery threshold of five hundred euros is reached by a smaller order. A net price agreed in 2024 is still a net price. The list went up six per cent; the pocket price went up two or three; and the sales team, who were asked whether the increase went through, answered truthfully about the only number they could see.

Why this year it matters more than usual

In a stable cost environment a leaky waterfall is an inefficiency. In 2026 and 2027 it is a margin cut, for three reasons specific to the Belgian and West-European distributor.

The cost base is moving faster than the leak closes. The pivot index is forecast to be crossed again in November, the health index is forecast to grow by close to four per cent in 2027, and the sector agreements will carry wages up with it in January. A distributor's cost per order line is mostly people and transport, both of which are indexed or close to it. A two-point price realisation on a six-point increase does not cover that.

The principals are repricing too. Most distributors buy from manufacturers who had the same 2026 and face the same 2027. Their letters are arriving now. A distributor that passes a supplier increase through at list but collects it at pocket is absorbing the gap twice, once on the way in and once on the way out.

The customers have learned the game. The larger accounts, who are the ones with rebate ladders, net prices and extended terms, employ buyers whose annual objective is to accept the list increase publicly and recover it privately. That is their job and they are good at it. The distributor that negotiates the list in January and leaves the conditions untouched is negotiating against professionals with one hand.

The sector data say the same thing from the other side. In a survey of two hundred and thirty-nine senior leaders at wholesalers and distributors across North America and Europe published this year, only about a quarter said they were ahead of their gross-margin plan, against three in ten ahead of their revenue plan. Revenue is tracking the increase. Margin is not. The difference is the leak.

The audit: one day, four steps

None of this requires new software. It requires the invoice lines for the last twelve months, the rebate and bonus accruals, the freight cost per delivery, the payment-terms ledger and one competent analyst for a day. The steps are these.

Build the waterfall for the top fifty customers and the top two hundred articles. List price, on-invoice discounts, invoice price, then every off-invoice item allocated back to the customer and the article: rebates, bonuses, promotional support, freight absorbed, cost of terms at the company's marginal borrowing rate, credit notes, surcharges waived. The output is a pocket price and a pocket margin for every customer-article pair that matters, and the price-realisation ratio for each. This is the step that takes most of the day and it is the only one that is genuinely work.

Plot realisation against volume. On one chart, every customer: horizontal axis annual purchases, vertical axis price-realisation ratio. In a disciplined distributor the points form a band that slopes gently downward, with the largest customers paying somewhat less. In most distributors the points form a cloud. The small customers below the band are the sales team's exceptions; the large customers at the bottom are the ones whose conditions were negotiated by a professional. Both are visible in a minute once the chart exists, and neither is visible anywhere else in the company's reporting.

Name the three largest leaks in euros. Not in per cent; in euros, for the full year. In most distributors three items account for two-thirds of the gap between list and pocket, and the same three come up again and again: rebate and bonus thresholds not re-based after the increase; delivery thresholds and freight absorption set at pre-2022 freight rates; and customer-specific net prices older than eighteen months. Payment terms are usually fourth. Each of the three has an owner, a contract clause or a system setting, and a date on which it can be changed, which for most of them is the January letter.

Re-base, then re-price. The January letter should carry, alongside the percentage on the list, the new rebate thresholds, the new delivery threshold, the expiry of every net price older than a year and the index clause that applies from the first of January regardless of anniversary. This turns the price round from a single number the buyer can recover elsewhere into a set of conditions he has to negotiate one by one, in daylight. The percentage on the list can then be lower than it would otherwise have been, which is the argument the sales team will need and the one that makes the letter easier to send.

The incentive behind the leak

The audit will show where the money went. It will not, by itself, stop it going there again, because the leak is not an accident. It is the product of an incentive.

If the sales team is paid on revenue, or on volume, every exception that keeps an order is rational, and the net price that wins the account is a success. If the sales director's bonus is on invoiced margin, the rebate that is accrued below the invoice is invisible to him and costless. If nobody owns the freight line, delivery is free. The leak lives in the gap between the number the company measures and the number it actually earns, and the people closing the gap are, almost always, behaving exactly as the measurement tells them to.

The structural fix is the same as for any metric problem: pay on the number that matters. Sales incentives on pocket margin, after rebates, freight and terms, with the waterfall visible to the representative for each account he manages. A pricing authority matrix that states who may grant a net price, for how long and with what review. A rule that no condition is granted in euros when the list moves in per cent. None of this is sophisticated. It is the minimum structure that stops the company announcing one price and collecting another.

The board number

For the chair, the question is not the percentage in the letter. It is: what share of the list price did we actually collect last quarter, and in which direction is it moving? Price realisation, as one ratio, quarterly, next to gross margin, tells the board in a glance whether the price round worked or merely happened. A ratio that falls in the quarters after an increase is the signature of a distributor that raised its list and re-based nothing. It is also, as with every number in this series, the one a buyer's commercial due diligence will compute first in 2028, and a distributor that already has it on one page has shown something about how it is run.

What to do Monday morning

Ask the finance director for the pocket price and the price-realisation ratio of the ten largest customers for the last twelve months. If the answer is that the company does not compute it, the audit above is the first item on the pre-January agenda and it is one analyst-day.

Ask the sales director for every customer-specific net price in the system older than eighteen months, with the date it was granted and the reason. The list will be longer than expected and at least a third of the reasons will no longer exist.

Pull the rebate and bonus ladders, the delivery threshold and the standard payment terms, and ask one question of each: was it re-based when the list went up in January? If not, that is the second half of the price letter you are about to write.

Then draft the January letter with both halves in it. The customers will negotiate the conditions; that is their job. The point is that this year they negotiate them in the open, and the increase that is announced is, for the first time in a while, approximately the increase that arrives.

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