Price-Volume-Mix Analysis: A Key Tool for Improving Enterprise Performance

Editor's note:This article is a contributed piece from theVendavoChief Financial Officer Dayton Kellenberger, and the views expressed are solely those of the author.

For CFOs, analyzing how much each product, service, and revenue stream contributes to company profits is a challenge. One tool I use at Vendavo, a pricing optimization software company, is price-volume-mix (PVM) analysis.

You might call this analysis a revenue bridge, sales bridge, or variance analysis, but regardless of the name, it helps you explain changes in performance factors at a granular level.

In short, PVM analysis helps break down changes in revenue or profit into key components. The resulting report shows the gap between expected and actual sales, as well as the three main factors that may drive these gaps—price effect, volume effect, and mix effect.

The price effect refers to the impact of increases or decreases in unit selling price; the volume effect refers to changes in the number of units sold; and the mix effect refers to changes in the sales mix, i.e., the percentage change in the volume of each reference item relative to the total.

PVM analysis is particularly effective when performed bottom-up, enabling you to identify the causes of variances at the product, customer, region, or other levels.

Standardize your price-volume-mix assessments

Tracking the reasons behind price increases can be particularly difficult, but identifying cause-and-effect relationships is crucial for the organization's long-term growth. PVM is designed to help you clearly communicate changes to executive colleagues by diving into the details. For example, you can consider the impact of exchange rates or study broader win/loss metrics in the business. In industries where cost fluctuations make profitability forecasting difficult, you can incorporate cost categories and conduct PVM assessments on a profit basis.

Challenges in building the bridge

When setting up PVM analysis, expect obstacles. First, standardizing information is difficult because it is based on different items, and reports are often completed outside standard reporting systems, frequently involving spreadsheet operations.

Second, PVM is often limited to high-level applications, meaning it is effective in communicating the reasons for variances (price, volume, mix, cost, etc.), but it may be difficult to break down for more specific applications.

Third, deep drilling is difficult. When designed for company-level reporting, PVM can be challenging to drive more granular assessments at lower-level business units, product lines, sales regions, and so on.

Finally, it needs to be tailored to stakeholders. Naturally, different stakeholders have different needs. Effective PVM analysis should provide relevant and actionable information based on an individual's function within the organization.

Benefits of building the bridge

Despite the challenges, PVM analysis offers significant value. By identifying and isolating the impact of pricing on revenue or profit, and then filtering data by relevant business parameters, you can measure the effectiveness and shortcomings of pricing actions and initiatives. For example, once you understand what works in high-performing business areas, you have the information to replicate that success across the organization and improve profit margins.

The data obtained from the analysis helps optimize pricing practices, ensuring implementation in the most advantageous way. At the same time, it helps your team and company gain a deeper understanding of customer behavior and the best ways to engage with customers at a granular level.

In essence, robust analysis helps you form data-driven, informed business insights. When investors or other stakeholders next ask questions about pricing or customers, you will have answers based on a deep analysis of all major factors. This data also enables you and your management team to make appropriate, well-founded strategic decisions and adjustments that benefit the organization in the long term.

The necessity of PVM

To drive strategy with consistent, reliable performance measurement, all CFOs and their teams need robust variance analysis capabilities. Business leaders need to leverage strong PVM analysis to efficiently evaluate sales patterns and adjust accordingly. Impacting overall profitability requires insights to enhance decision-making and revenue growth.

However, to support the business needs of all stakeholder groups in the organization, you need granularity to pinpoint potential problem areas. PVM analysis is the answer, but it is not a one-size-fits-all model. An enterprise-level, purpose-built framework provides consistent analytical results for quick assessments, benchmarking, and scenario comparisons. Together, these capabilities support your efforts to drive revenue growth and margin improvement.