Businesses run to earn profits; commodities are sold for a price that brings in high revenues and profit. Organizations keep costs low to keep profit percentages high; each commodity has different profit margins. Companies calculate profits earned from different products through sales mix. It is a measure that helps organizations grow; considering profit as the primary objective, sellers decide the future of products and services.
It is an essential measure for every business around the world. Investors want to know about products that provide high revenue; however, it is not essential that all products or services that provide high revenue generate higher profits. Profit depends upon the profit margin of each commodity. This article is all about profit and profit margin. You will also learn about sales mix, its definition, formula and best practices. Also, find out how it allows companies to earn better profits. Read till the end to learn all about it.
Sales Mix
Companies sell more than one commodity, and tracking each commodity is crucial. Some products perform well while other doesn't perform at all. So, sellers must know which product is performing at which level. Sales mix allows companies to learn the performance of products and services. The formula calculates the percentage of single product revenue from total revenue. Organizations learn about marketing and the performance of strategies through it.
It is one of the most important analytics in businesses. Calculating is easy; companies could also use online tools for calculation. Reports were gathered to show how the company is performing at different levels. The proportion of each product in sales is shown through it. So, read this article till the end to learn about the calculation methods and how managers could easily analyze performance through this measure. Regular calculations are crucial to the stability of business and performance of the seller.
How to Calculate
Several methods are available to check a product's contribution to companies profit. Companies based on products and services utilize different methods of calculation to calculate sales mix. Simplest of all methods is calculation of profit margin; seller calculates the profit margin of each product and compares it. Comparison shows how much a product contributes to the business. Formula shows which products have higher profit margins, so sellers could focus on them to increase profits.
Several other calculation methods are available for companies that have huge networks around the world. Online tools are the best option; some businesses create their own software to help them out with calculations. New businesses in the market could rely on manual methods; CRMs and other online tools are expensive. Sellers could learn calculation methods from this article to perform themselves. Below you will find a formula for sales mix, mix percentage, contribution margin and mix variance.
Sales Mix Formula
Let's calculate our formula for a business, the company called ABC. A famous clothing brand that has good business in the international market. Company is earning high profits, but the calculation is being performed to teach you guys. We would solve for two products, a Hoody and a jacket. So, let's check how margin each product has.
Calculations
Item 1= Hoodie
Hoodie's Price= 250 dollars
Hoodie’s Cost= 60 dollars
Total Profit= 250 – 60 = 190 dollars
Item 1 Profit Margin = 190/250 = 0.76 = 76% profit
Item 2= Jacket
Jacket's Price= 200 dollars
Jacket’s Cost= 30 dollars
Total Profit= 200 – 30 = 170 dollars
Item 2 Profit Margin = 170/200 = 0.85 = 85% profit
Interpretation
Following the above results, ABC company should focus on production and sales of product 2 because product 2 has a high-profit margin compared to Hoody. Jacket's profit in dollars is less compared to Hoodie, but margin stands high. Company should invest more in 2nd product and increase investment in jacket production and marketing. This measure is crucial when deciding company's focus sale product; however, to analyze problems and get solutions, further research is required.
ABC should produce a higher amount of jackets, return on investment would increase by investing in a second product. Production of Hoody shouldn't be halted because often sales of one product lead to another, and Hoody is profitable; however, the margin is low. Organizations should invest more in jackets than Hoodys to improve profits.
Sales Mix Percentage
Percentage shows the percentage a product has in the total sale; the percentage is essential while determining the marketing focus of a product. Project and current mix percentages are two types of percentages utilized to calculate the percentage of commodities sold. Below we would calculate projected mix percentage of ABC company.
Calculations
Item 1= Hoodie
Number of Sold Hoodies= 1000
Total Sold Quantity= 10,000
Projected Mix Percentage= 1000/10000 = 0.10 = 10%
Item 2 = Jacket
Number of Sold Jackets= 1600
Total Sold Quantity= 10,000
Projected Mix Percentage= 1600/10000 = 0.16 = 16%
Interpretation
The above data shows that the previous company sold around 10% of hoodies from total items sold and 16% of hoodies. Everything remaining same company would have same numbers for the next quarter. Future prediction power based upon the above calculation isn't strong enough. High risks are available because the organization is monitoring internal factors. External factors, like weather, inflation, and natural disaster, could impact prediction power.
Clothing brands before 2020 had high demand, but following year, after corona pandemic. Demands for products decreased companies prediction power based upon projected sales mix percentages turned out false. Such predictions in businesses have very little importance; however, they show a slight trend of demand for products and services. Methodologies utilized based upon the above estimate could be disastrous.
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Sales Mix Contribution Margin
Contribution margin is the amount a company looks forward to earning from a single product. Company then counts the number of items it needs to sell to reach that revenue level. Calculation is done in through two simple formulas. Below you can find the measurement method of sales mix contribution margin.
Calculation
Item 1= Hoodie
Total Items Sold= 1000
Total Sold Quantity= 10,000
Projected Mix Percentage= 1000/10000 = 0.10 = 10%
Hoodie's Price= 250
Hoodie’s Cost= 60
Total Profit= 250 – 60 = 190
Total Net Revenue from Previous Quarter= 950,000
Hoodie Contribution Margin= 950000 x 0.10 = 95,000
Item 2= Jacket
Total Items Sold= 1600
Total Sold Quantity= 10,000
Projected Mix Percentage= 1600/10000 = 0.16 = 16%
Hoodie's Price= 200Hoodie’s Cost= 00
Total Profit= 200 – 30 = 170
Total Net Revenue from Previous Quarter= 950,000
Hoodie Contribution Margin= 950000 x 0.16 = 152,000
Now calculate the total number of items required for selling.
Item 1= Hoodie
Total Profit= 250 – 60 = 190
Hoodie Contribution Margin= 950000 x 0.10 = 95,000
Total Number of Hoodies Need to Be Sold= 95,000 / 190 = 500
Item 2= Jacket
Total Profit= 200 – 30 = 170
Hoodie Contribution Margin= 950000 x 0.16 = 152,000
Total Number of Jackets Need to Be Sold= 152,000 / 170 = 895
Interpretation
This stage is very crucial; the real report comes out at this stage. Sales department learns about the problems associated with selling strategies. Above details shows that the amount sold by ABC in previous quarters are less than required for jackets. Organization sold 500 hoodies and 800 jackets; the margin of jackets was high, as mentioned earlier. However, current calculations show that the required amount to be sold was 895, so the company needed to sell 95 more jackets.
Sales mix percentage is not always the answer; profit margin must be discussed to get total information about the product's performance. Different commodities act; differently; the impact of marketing and Prospecting comes out different. Companies must measure all metrics to ensure that nothing is left out. Problems in methodologies could only be understood once the business knows all metrics associated with selling. So, ABC company must focus on jackets and invest more in selling jackets.
Sales Mix Variance
Difference between prediction and actual sales mix is called variance. Companies calculate it to find problems in selling strategies. Variance calculation is among the most crucial ones; companies require that measurement to make their future decisions. Below you will find a method of calculating variance.
Calculation
Item 1= Hoody
Total Items Sold= 1000
Total Sold Quantity= 10,000
Actual Mix Percentage= 10%
Budgeted Mix Percentage= 10%
Hoody's Price= 250
Hoody’s Cost= 60
Total Profit per Hoody= 250 – 60 = 190
Variance= 500 X (0.10 – 0.10) x 95 = 0
Item 2= Jacket
Total Items Sold= 1600
Total Sold Quantity= 10,000
Actual Mix Percentage= 14%
Budgeted Mix Percentage= 16%
Hoody's Price= 200
Hoody’s Cost= 30
Total Profit per Hoody= 200 – 30 = 170
Variance= 1600 X (0.14 – 0.16) x 170 = -5440 dollars
Interpretation
So Hoodie's variance turns out to be zero, which means there is no difference between budgeted and actual percentage; however, the difference between Jacket's budgeted and actual percentage is -5440 dollars. Means that company must sell jackets worth -5440 dollars to turn sales variance zero. Details above give the organization the key problems. Once the problem is found, sellers could work on it and solve it. Changing methodologies or utilizing expert advice could help solve problem.
If variance in both products was zero, then that means the company doesn't have any problem. Positive variance shows revenue growth; most organisations work to increase the number of sold items, so variance turns out positive.
Solving Sales Problems
The above calculations don't mean anything if sellers don't know how to capitalize on results. The above results show that the jackets are lacking in sales. The company must focus on jackets because item has the potential to improve revenue. To increase the demand for jackets, organizations must invest more in the marketing area. Marketing pays off by creating demand; high demand for jackets means better profit margins. So, above calculation only have importance when marketers and sellers know their worth and how to capitalize.
Evaluate Product
Check problems in product; jackets might be performing better in the past; however, currently, it's not performing well. Sales Representatives must look into the selling methodology and other factors that might influence the items sold. External factors mentioned earlier could impact the number of items sold; jackets are products of winter. Demand for products might reduce during summer, so a seasonal product cannot be blamed for low output.
Other problems might include a lack of focus from marketing departments. Marketers reduce marketing for products that are selling well; such tactic is utilized to keep costs low. Check the actual problem behind low sales. Above calculations determine problem exists, but only detailed analyses could actually show the actual problem.
Improve Marketing
Marketing could actually impact the performance of commodities; marketing is like magic. In our example, jackets were falling behind, so little investment in marketing could improve sales. Sometimes people aren't aware of the commodity, but marketing fills that gap and creates a name for brand. Before marketing and research tactics that bring in better results, marketing for jackets in Dubai and Saudi Arabia won't work. The hot weather conditions are a big hurdle; however, marketing in Switzerland would bring results. So, research before marketing could change the results of sales.
CRM Integration
CRM integration with your marketing and selling efforts could increase profit. CRM automates the calculations for the organization. Companies that work on daily calculations require CRM. It provides actual results and doesn't waste time of sellers. Customer relation management tools could help automate the Sales Mix calculation to save time.
Conclusion
Businesses are operating for only single purpose to gain profits; companies that claim profit-making as second goal are lying. Businesses, whether B2B or B2C, only work to earn; helping out people happens in between, so if you want to grow company earnings, utilize sales mix measurements to find problems with your commodity performance and solve them through business strategies.
