Every company has a product or offering that performs better with customers than others. Whether it’s an athletic apparel company that has one style of legging that outsells the rest, or a car manufacturer that has a specific model their customers flock to.
It’s a universal business truth — not every product you offer is going to sell at a high rate at all times.
Although this is a part of doing business it is important to understand which products are performing well, which products are not performing well, and the factors leading to the performance of both. How does one uncover this information? By understanding your company’s product sales mix.
What is sales mix?
Sales mix is the proportion of sales in individual product accounts for in a company’s total sales. You can find sales mix by comparing the profit earned by a specific product to the total amount of sales brought in by the company during a specific period of time.
When you dig into what your company’s sales mix is, you uncover hard data that tells you exactly how much money the sale of each product is contributing to the bottom line. This can not only help you determine how to set future budgets, but it can also provide valuable information about the function, placement, and selling strategies behind each product your company offers.
First, let’s walk through how to calculate sales mix for your business.
Sales Mix Formula
To calculate sales mix, begin by understanding the profitability of each product your company sells.
Profit = Retail Price — Cost of Goods Sold
To keep things simple, let’s approach this by unit. In this example, your company sells supplements, and you want to compare two of your products — a multivitamin that retails for $35 and a protein powder that retails for $65. Let’s walk through how to calculate the sales mix with this information.
Retail Price for One Unit — $35
Cost to Company — $8.75
Profit = $35 — $8.75 = $26.25
Once you have your profit value, it’s time to find the profit margin. Find your profit margin by dividing your profit value by the sale price.
Profit Margin = Profit / Sale Price
Let’s use this equation for our multivitamin example:
Profit Margin = $26.25 / $35 = 75%
This means for every $100 worth of multivitamins your company sells, it results in $75 of profit.
Now, let’s compare this value to the protein powder.
Retail Price for One Unit — $35
Cost to Company — $21
Profit = $35 — $21 = $14
Profit Margin = $14/$35 = 40%
This means for every $100 worth of protein powder your company sells, it contributes $40 to the bottom line.
Through these calculations, we can see that the more multivitamins you sell, the more profitable your sales mix is. It doesn’t mean your company should discontinue selling protein powder, however, it could mean devoting more focus to selling multivitamins could lead to more profit. This could look like allocating more resources to paid advertising for multivitamins or leveraging multivitamins as an up-selling opportunity.
Now that you understand what sales mix is, and how to calculate it for the products your company sells, let’s discuss ways your company can make necessary improvements to sales mix to bring in more profits.
To improve your company’s sales mix, you need to understand sales mix variance.
Sales Mix Variance
Sales mix variance explains the difference between the sales mix a company has budgeted for and its actual sales mix. This information helps companies understand how well their products are performing, providing valuable information about the potential profitability of their products.
Chances are, your company has budgeted sales targets for each product that you and your team are working towards. From these budgeted sales targets, your company can estimate what sales mix will be to reach your sales target. At the end of the month or quarter, you can compare the actual sales made and sales mix to what was projected.
Here’s the information you need about each product to calculate the sales mix variance:
Number of actual units sold
Actual sales mix percentage: the number of actual units sold of a product divided by total units sold of all products
Budgeted sales mix percentage: the number of budgeted units sold of a product divided by budgeted total units sold of all products
Profit margin per unit (in dollars, not percentage)
Here’s the formula for sales mix variance:
Sales Mix Variance = Actual Units Sold x (Actual Sales Mix Percentage — Budgeted Sales Mix Percentage) x Profit Margin Per Unit
Now we can apply this formula to our supplement company example.
Let’s say our supplement company has a goal of selling 750 total units, 500 units of multivitamins and 250 units of protein powder, during a sales period. During this period, the company actually sells 1000 total units, consisting of 700 units of multivitamins and 300 units of protein powder.
The actual sales mix percentage for each product is as follows:
700 units of multivitamins / 1000 actual total units sold = 70%
300 units of protein powder / 1000 actual total units sold = 30%
The budgeted sales mix percentage for each product is as follows:
500 budgeted units of multivitamins / 750 budgeted total units sold = 66.7%
250 budgeted units of protein powder / 750 budgeted total units sold = 33.3%
Now let’s calculate the sales mix variance for each product.
Sales Mix Variance for Multivitamins = 700 x (70% — 66.7%) x $26.25 = positive variance of $606
Sales Mix Variance for Protein Powder = 300 x (30% — 33.3%) x $14 = unfavorable variance of $138.6
Through these calculations, we can see the sales of multivitamins had a positive variance, meaning the company made an additional $606 dollars in sales of this product. For the protein powder, there was an unfavorable variance, meaning the actual cost to produce and sell the protein powder was $138.60 greater than the expected cost.
Understanding the sales mix of your company’s product line is a value-added activity that can provide necessary insight into the priorities of your customer. Head to this post to check out the other sales metrics you should be tracking.
Originally published Apr 22, 2020 8:30:00 AM, updated April 22 2020