Glossary

A repository of acronyms, jargon, and useful definitions perfect for eCommerce founders & marketers like yourself.

Mix-effect measures the impact on the sales amount resulting from a change in the mix of quantities sold.

With mix-effect, even by keeping the total quantities and prices the same, sales can increase if we sell a higher proportion of expensive products.

It is calculated as the difference between the actual unit and the actual unit at budget price multiplied by the budget price.

For example, if we calculate the mix-effect for any product where the actual unit is 30 and the actual unit at a budget price is 15, then:

Mix effect on quantities 30-15= 15 units.

In this case:

Mix effect= Mix effect on quantities x budget price = 15 x 100 = 1500 EURÂ

- Price Impact (applying higher or lower selling prices per unit)= Target Volume * (Actual price - Target price)
- Volume Impact (variation in the number of units sold)= Target Price * (Actual volume - Target volume)
- Mix Impact (change in the mix of quantities sold)= (Actual volume - Target volume) * (Actual price - Target price)

- Diagnostic purpose: Mix effect and price can explain changes in margin and sales
- Performance management: If new products or investing in marketing is supposed to improve the mix, then these KPIs can be used to evaluate performance and set the target in advance

- Standardizing your Price-Volume-Mix assessment: Tracking the reason for cost increments can be difficult, yet distinguishing causality is critical for your association's drawn-out development. PVM is proposed to assist you with recognizing and conveying the changes to your C-suite associates by empowering you to bore down into the subtleties. In businesses where unstable costs make anticipating profitability harder, you may incorporate a cost bucket and make your PVM assessment on a margin basis

- Bridge-building benefits: By identifying and distinguishing the impact of pricing on your revenue or margin and filtering this data by relevant business parameters, you can quantify the adequacy â€” and inadequacies â€” of your pricing activities and strategies. The data from the analysis can help you improve your pricing practices and ensure that you are implementing them to get the maximum profit

- Use the formula for mix effect: (Actual Units - Target Units) x Budget Price
- Analyze it for each product or product category
- Identify products with positive and negative mix effects

Example:

- Positive mix effect > $1,000: Increase price by 5%
- Positive mix effect between $500 and $1,000: Increase price by 3%
- Negative mix effect < -$500: Consider price decrease or promotional strategies

- Determine your primary goalâ€”for example, is it increasing revenue to maximize profit, or aligning with brand positioning?
- Consider the impact of price changes on customer perception and demand elasticity

- Analyze product-level contribution margins (price - variable cost)
- Focus on maximizing sales of high-margin products with positive mix effects

- Understand how customers respond to price changes for different products
- Use historical data or conduct market research to assess price elasticity

- For products with positive mix effects and low price sensitivity: Raise prices to capture more value
- For products with negative mix effects and high price sensitivity: Consider lowering prices to stimulate demand
- Experiment with bundle offerings or targeted promotions to influence the mix effect

- Track the impact of price changes on revenue, mix effect, and profitability
- Adjust prices further based on ongoing analysis and market trends
- Use PVM analysis regularly to decompose revenue changes and make informed decisions

- Factor in psychological pricing strategies (e.g., charm pricing, price anchoring)
- Take good note of competitor pricing and adjust accordingly
- Align pricing with inventory levels to avoid stock outs or excess stock
- Make sure you donâ€™t adjust pricing based on a categoryâ€™s mix effect thresholdâ€”instead, focus on the mix effect of individual products
- Apply appropriate rounding rules to new pricesâ€”for example, round up $47.54 to $49.99Â

The Blanket Rule: Analyze the variances for each product and timeframe.Â

Positive values indicate increases in revenue due to that factor (e.g., price increase leading to positive price variance), while negative values indicate decreases.

In case you missed it, PVM Analysis can help find trends and patternsâ€”answer these questions:

â€śAre certain products driving more price varianceâ€ť, or are specific periods seeing significant volume or mix effects?

- Furthermore, if a product has a high positive price variance, consider raising its price further
- Similarly, if another product has negative volume variance, figure out the reasons and adjust its marketing or promotions accordingly
- You can further break down the mix variance into â€śquantity mixâ€ť and â€śprice mixâ€ť to understand the specific influences within the combined effect
- Lastly, PVM can be the make-or-break factor when it comes to price wars

Mix Effect Formula:

- (Actual Units - Target Units) x Budget Price

Price Impact / Price Variance Formula:

- (Actual Price - Average Historical Price) x Actual Quantity

Volume Impact / Volume Variance Formula:

- (Actual Quantity - Average Historical Quantity) x Average Historical Price

Mix Variance Formula:

- Actual Revenue - (Average Historical Quantity x Actual Price)

Cost Variance Formula:

- Cost Variance = Actual Costs - Budgeted Costs

Additional Formulas:

- Total Revenue Variance = Price Variance + Volume Variance + Mix Variance
- Profit Variance = Revenue Variance - Cost Variance

Remember:

- Budget Price can be a historical average, ideal price, weighted average, or other relevant benchmarks
- Average Historical Data is usually based on a previous period (e.g., previous month, quarter)
- Positive Variances indicate increases in revenue or margin due to that factor
- Negative Variances indicate decreases in revenue or margin due to that factor

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In this example, we have taken two productsâ€”Sneakers at $54 MSRP and boots at $105 MSRP.

We'll conduct a PVM analysis for the month of December, comparing it to the historical average prices and volumes from November.

Thus, the PVM Calculations are as follows:

Price Variance:

- Sneakers: ($54 - $52) * 50 = $100
- Boots: ($105 - $100) * 50 = $250
- Total Price Variance: $100 + $250 = $350

Volume Variance:

- Sneakers: (50 - 60) * $52 = -$520
- Boots: (50 - 40) * $100 = $1,000
- Total Volume Variance: -$520 + $1,000 = $480

Mix Variance:

- Sneakers: $2,700 - (50 * $54) = -$300
- Boots: $5,250 - (50 * $105) = -$250
- Total Mix Variance: -$300 - $250 = -$550

To calculate profit, we need to consider both revenue and costs. Assuming the cost per unit for sneakers is $30 and for boots is $70, we can calculate:

Total Revenue:

- Sneakers: $54 * 50 = $2,700
- Boots: $105 * 50 = $5,250
- Total Revenue: $2,700 + $5,250 = $7,950

Total Cost:

- Sneakers: $30 * 50 = $1,500
- Boots: $70 * 50 = $3,500
- Total Cost: $1,500 + $3,500 = $5,000

Total Profit:

- Total Profit = Total Revenue - Total Cost
- Total Profit = $7,950 - $5,000 = $2,950

- Formula: TPV = ÎŁ (Actual Price - Average Historical Price) * Actual Quantity
- Sneakers: ($54 - $52) * 50 = $100
- Boots: ($105 - $100) * 50 = $250
- Total Price Variance Profit: $100 + $250 = $350

This means price increases contributed $350 to overall profit.

- Formula: VVP = ÎŁ (Actual Quantity - Average Historical Quantity) * Average Historical Price
- Sneakers: (50 - 60) * $52 = -$600
- Boots: (50 - 40) * $100 = $1,000
- Total Volume Variance Profit: -$600 + $1,000 = $400

Increased volume for boots contributed $1,000 to profit, but decreased volume for sneakers resulted in a loss of $600, leading to a net gain of $400.

- Formula: MVP = ÎŁ (Actual Revenue - (Average Historical Quantity * Actual Price))
- Sneakers: $2,700 - (50 * $54) = -$300
- Boots: $5,250 - (50 * $105) = -$250
- Total Mix Variance Profit: -$300 - $250 = -$550 (matches the provided figure)

The mix variance is negative because the combined effect of price & volume changes for each product resulted in lower revenue than what could have been achieved with simply maintaining historical prices and quantities.

- Price Variance Profit: $350
- Volume Variance Profit: $400
- Mix Variance Profit: -$550
- Total Profit: $350 + $400 - $550 = $200

- The positive price variance ($350) indicates that price increases contributed to higher revenue
- The positive volume variance ($400) suggests that selling more units also boosted revenue
- However, the negative mix variance (-$550) means that each product's price and volume changes negatively impacted revenue, suggesting potential shifts in customer preferences or product profitability
- While price and volume increases contributed positively to profit, the negative mix effect overshadowed those gains, resulting in a total profit of $200
- The store could consider further price increases for boots, as they had a strong positive price variance
- Investigate the reasons for the negative mix variance, such as lower-than-expected demand for sneakers or a shift in customer preferences towards boots

Note: These calculations assume a constant cost per unit. For variable costs, adjust the Total Cost formula accordingly.