The pocket price waterfall, the decomposition of list price down to the margin actually retained, introduced by Marn and Rosiello in Harvard Business Review and since standard in pricing practice, exists because the difference between invoice price and pocket price is systematically invisible in revenue reporting.
In the canonical pocket margin walk, Lot Size and Volume Erosion is the largest commercial-zone drop at $1.5M, larger than pricing leakage or discount leakage individually. It is also the only commercial concession whose cost is borne entirely by a function that did not agree to it.
The mechanism
A volume break is quoted against an annual commitment. The commitment is real; the lot size implied by it is not. The customer takes the annual volume in twelve irregular releases, and the plant runs twelve short batches against a price set for four long ones. The discount was priced against a manufacturing economics case that never occurs.
Nothing in the transaction flags this. The order books at the agreed price. The plant absorbs the changeover frequency into standard cost variance. Manufacturing reports a utilization miss; sales reports a won account. The margin difference is real, distributed, and attributed to neither.
Priced by sales, absorbed by operations, discovered by no one — and defended at every review as a manufacturing variance.
Why standard costing hides it
Standard cost is set against an assumed run length. When actual run lengths compress, the variance appears as a manufacturing efficiency problem, the plant “missed standard”, rather than as a commercial pricing decision that made standard unachievable. The signal arrives in the wrong function, framed as an operational failure, roughly a quarter after the commercial commitment that caused it.
The horizontal chain
Sales → Manufacturing → Realized Margin. A concession granted against lot sizes the plant will never run converts a commercial courtesy into permanent unit-cost erosion. Priced by sales, paid for by operations, discovered by no one.
Procurement → Production → Absorption. Raw material buys sized to the quoted volume rather than the released volume push inventory onto the floor, layering a working-capital cost onto a margin cost.
The control point
The correction is a reconciliation step, not a policy: quote-to-run lot validation before commercial commitment, so the discount is priced against the batch profile the plant will actually execute. Where the customer requires release flexibility, the flexibility is priced rather than absorbed.
A volume discount is a manufacturing commitment expressed in commercial language. It should be underwritten by the function that has to deliver it.