I hate to break it to you, but even if you hit your sales target in terms of volume, there is still a possibility you can miss your revenue target. Although this scenario can be disappointing, it is a reality of doing business, especially for those working in competitive markets.
Do you know how to track this information, and how to adjust your sales strategy if your sales revenue comes up short, despite reaching your sales volume goals? If not, you’re in luck because today I’m going to tell you exactly how to find this information by calculating sales variance for your company’s products.
Sales variance accounts for the difference between actual and budget sales. Understanding sales variance allows companies to understand how their sales are performing against market conditions.
Essentially, sales variance tells you the difference between how much you expected to sell your products for and how much you actually sold your products for. Before we dive into the equation you need to calculate sales variance, let’s discuss why sales variance happens and what outcomes you can expect.
What Is Sales Variance?
Sales variance occurs when the actual sale price differs from the budgeted price determined by your company. When you calculate the sales variance the final result can either be favorable, which is when the company receives more money from the sale of a product than expected, or unfavorable, when the company receives less money from the sale of a product than expected.
When it comes to achieving a favorable sales variance, this often happens when a company is able to sell their product at a higher price than what was budgeted. This is more likely in less competitive markets where companies are able to charge a premium for their goods and services.
On the other hand, when unfavorable sales variance occurs it is often because a company charges less for their product than they were budgeting for. This scenario is more common in competitive markets where companies lower their prices in an effort to appeal to customers and get product moving out the door.
Now that we understand the causes and potential outcomes of sales variance let’s walk through how to calculate it.
How to Calculate Sales Variance
To calculate sales variance, you need the following values:
- The actual sale price of your product (per unit)
- The standard sale price of your product (how much you budgeted to sell your product for per unit)
- The number of units sold
Once you have this information handy, you can plug your values into the following sales variance formula:
Sales Variance = (Actual Sale Price — Standard Sale Price) x Number of Units Sold
Now let’s put this formula to use with an example. Say you work for a company that sells potted plants online, and your company expects to sell 100 pothos plants in decorative pots for $30 each. After one month, the plants are not selling as expected and your competitors are selling a similar product for $24, so your company marks your product down to $22 each.
During this sales period, your company sells all 100 potted pothos plants for $22. Using the formula, we can calculate the sales variance for the potted pothos plants.
Sales Variance = ($22 — $30) x 100 = - $800
From this calculation, we can see we there was an unfavorable variance of $800 from the sale of the potted pothos plants. This means the company brought in $800 less than anticipated from the sale of the plants. In this situation, the company reduced the price of their product to remain competitive, and although they were able to bring in sales using this method, they brought in less revenue than they originally hoped.
Let’s walk through another example of sales variance in action. In this instance, you work for a company that sells subscriptions to an online music streaming service. The founder of your company has a background in entertainment law and was able to secure the widest selection of music available — featuring numerous artists and albums that are unavailable on any other streaming platform.
Initially, your company budgeted to sell each subscription for $9 per month, however, you realized because of the broad music selection customers were willing to pay $15 per month. After a month of charging $15 per subscription, you were able to sell 1,000 new subscriptions. Using the formula, we can calculate sales variance for the music service subscription.
Sales Variance = ($15 — $9) x 1000 = $6,000
From this calculation, we can see there was a favorable variance of $6,000 from the sale of new subscriptions to your service. This means the company brought in $6,000 more than originally anticipated during this sales period.
This company was able to have a favorable variance because they offered a product customers were able to pay a premium for (the broader music selection).
Calculating sales variance for the products your company offers is a worthwhile activity for each sales period to ensure you are on track with your revenue goals. If for some reason you find your company has unfavorable sales variance and you are not in a position to raise your prices, you may want to consider revising your sales strategy in an effort to get more units out the door to account for the difference.
Head to this post to learn what other helpful sales metrics you should be tracking.