Price Volume Mix Analysis: How to Discover What Drives Your Revenue

Introduction to Price Volume Mix Analysis

Price Volume Mix Analysis (PVM) is a financial tool that helps businesses understand the changes in their overall revenue. It considers three factors to evaluate these changes: Pricing, Sales volume, and product or service mix (variety of products).

• Pricing: It evaluates how changes in pricing have affected their overall revenue.
• Sales volume: Here, the tools evaluate how the number of units sold affects the revenue.
• Product or Service Mix: It considers the impact of different products or services on the revenue.

Let’s say a business made some changes to boost its business to a new level, but instead, their revenue dropped significantly due to the new changes. Now, to identify the areas that caused the drop, the firm will use the price volume mix analysis method (PVM) in Excel, Power BI, Tableau, or Google Sheets, whichever they prefer. The PVM method will help them identify the source of this by digging deeper into all three areas: Pricing changes, product or service variety, and the sales volume to pinpoint the source.

Once done, the business will have a clear understanding of how it isn’t working for them. For example, the business might notice that the product they launched isn’t performing well in the market due to its poor quality. Now that they know the problem, they can either study their competitor’s products to get ahead or pull the product out to avoid further losses.

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Importance of Price Volume Mix Analysis

Price Volume Mix Analysis is not a tool that provides useless insights; the information that comes out of this tool helps businesses understand where they are lacking, which changes they made are affecting their profit, or where they should make some changes to improve their revenue. A business experiencing a lot of ups and downs in its revenue and can use this method to pinpoint why its revenue keeps fluctuating and what areas of improvement that can stabilize and improve them.

• Decision-Making: Price Volume Mix Analysis helps businesses understand what’s working for them and what isn’t. For instance, if the business experiences a sudden drop in revenue after the launch of a new product, the direct assumption would be that the competitor’s product is better. However, a PVM analysis might suggest that the product itself isn’t the problem; it is too high compared to others.
  
• Finding New Ways to Improve: As a business, if you know what are the factors that can increase your revenue, you are bound to focus on those things, and that’s what the Price Volume Mix Analysis helps you to do, help you understand where you can improve to increase your revenue. For example, if a business increases its product’s MRP by a few dollars and still has the same sales volume, then let’s stay with the same MRP.
  
• Planning: With the Price Volume Mix Analysis in their hands, businesses can use the tool at regular breaks to understand how implementing new things is going. They can spot all the changes, pinpoint any trends and market behaviour, and plan accordingly in the future to take advantage of them. For example, if the sales of the product increase during the holiday season, even with a slightly higher MRP, the business can plan to produce the product more, promote it at a higher level and reach out to more retailers to sell their products.

Components of Price Volume Mix Analysis

The PVM method breaks the business into three elements that drive the revenue: The price effect, the mix effect, and the sales effect.

Price Effect

The price element in the Price Volume Mix Analysis checks if the changes in price affect the revenue positively or negatively. For instance, if the business raises its prices by a few dollars, and the sales volume remains the same, it clearly states that the revenue has increased and the new pricing strategy works. On the other hand, if sales were to fall due to the new prices, the strategy would be considered a failure.

Volume Effect

The volume effect analyses whether the change in units sold is the main factor affecting the revenue. For instance, if a firm sells more products, the revenue is bound to go up, and vice versa.

Mix Effect

The mix effect is more product- or service-focused; it helps businesses understand which one of their products or services is more popular and contributes to revenue generation. A firm offering a wide range of products can benefit from this type of evaluation.

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Price Volume Mix Analysis Formula

Total Revenue Change = Price Effect + Volume Effect + Mix Effect

This is the basic end formula that is to be used to understand the total revenue the business is generating. However, to calculate each component of the formula, there are different processes.

Calculating the Price Effect

Price Effect = (New Price − Old Price) × Old Volume

For instance, let’s say the old price of the product was $45, and the new price is $50. We will take the constant sales volume (100) for better calculation, giving us:  

Price Effect = (50 − 45) × 100 = 500

This shows that the price change alone is responsible for an extra $500 in revenue generated.

Calculating the Volume Effect

Volume Effect = (New Volume − Old Volume) × Old Price

For example, let’s say the sales volume went up from 100 to 150; then the formula would give us the following:

Volume Effect = (150 − 100) × 45 = 2250

This shows us that just because of an increase in the units sold by 50 units increased the firm’s revenue by $2250.

Calculating the Mix Effect

Mix Effect =Total New Revenue − Old Revenue −(Price Effect + Volume Effect)

How to Perform a Price Volume Mix Analysis Step-by-Step

Step One: Data Collection

Collect the firm’s past and present data, which you want to compare, including the pricing data, sales data, and data about how much each product was sold.

Step 2: Calculate the Price Effect

Use the formula (Price Effect = (New Price − Old Price) × Old Volume) to calculate the price effect.

Step 3: Calculate the Volume Effect

Use the formula (Volume Effect = (New Volume − Old Volume) × Old Price) to calculate the volume effect.

Step 4: Calculate the Mix Effect

Calculate the Mix Effect to see how changes in the product mix affect revenue. (Mix Effect =Total New Revenue − Old Revenue −(Price Effect + Volume Effect))

Step 5: Calculate the PVM

Once you have all the data you need, move on to the main process to calculate the overall revenue change using the formula: Total Revenue Change = Price Effect + Volume Effect + Mix Effect.

Once you are done with the final calculation, the firm will be informed about what things are driving their revenue up or down and equipped with the knowledge about where they need to make changes.

Benefits of Price Volume Mix Analysis

1. Identification of Revenue Drivers

The Price Volume Mix Analysis method helps businesses to identify the core source of their income. It includes evaluating all the factors that are affecting the revenue positively or negatively.

If the business has a dropping revenue, PVM helps to recognize its core so the business can make changes to get back on track. If the business has an increasing revenue, it does the same so the business can adapt to the strategy.

2. Data-Driven Pricing Strategies

With Price Volume Mix Analysis at hand, businesses can assess the impact of the old and new pricing strategies with ease and make their decision about whether to continue with the same pricing or whether changes are needed.

3. Improved Sales and Marketing

Price Volume Mix Analysis helps businesses learn about when their sales are up; this helps them to increase their promotional activities during those times to boost their sales further. For instance, a business experiencing peak sales during Christmas would increase its promotional activities more right before December to attract and increase its sales.

4. Better Product Mix Decisions

PVM help companies to realize which line of product has a higher sale, what product varieties are generating more revenue, and whether their high-end products are something people are interested in. This helps them to make decisions about what products they should expand on.

5. Better Inventory and Resource Management

With Price Volume Mix Analysis, businesses have a better grasp of which products are generating more revenue and being sold more. It also shows them their peak seasons when the products are sold the most. With this information, businesses can reduce their inventory cost and order accordingly, keeping things efficient.

6. Forecasting and Planning

With trend identification and past data, businesses can predict when they are going to have a boosted sales period. This makes budgeting easier, and the firm can avoid spending extra on inventory and extra raw materials that might go bad if kept for a longer time.

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Frequently Asked Questions (FAQs)

Final Statement

Price Volume Mix Analysis dives into the depth of business and comes up with everything the business needs to know about its operations, mainly its sales, prices, and product mix. It provides insights into how these three elements impact the overall revenue of the business and how any changes in these can impact the firm’s financial performance.

This analysis allows for better pricing and product strategy, as well as more informed decisions across sales and marketing initiatives. Excel and Power BI make it easy to conduct a PVM Analysis, empowering teams with the data-driven tools they need to maximize profitability.