What is Sales mix?
Definition: Sales mix is a financial metric that ascertains the proportion that each product or service sold, contributes to total sales.
In its purest form, it is the ratio for each product relative to the overall sales volumes of products. Likewise, it is a collection of all the products and services sold by a company.
Understanding Sales Mix in Business
The calculation of sales mix helps ascertain the impact of each product on total sales. In most cases, different products or services tend to bring about different levels of profitability regardless of the total number of units sold. A change in sales mix, therefore, tends to have a significant impact on the level of profitability that any business is likely to achieve.
When a company is profitable, it is likely to increase focus on a given product or service that is accounting for a huge share of total sales. Likewise, the business might have to go slow on some products or services that have minimal impact on profitability in a bid to increase focus and resources on profitable products. Therefore Economists and analysts rely on sales mix data to estimate companies’ prospects for growth as well as profitability.
When it comes to calculating sales mix, it is important to understand the cost and contribution made by each product sold. In this case, you will have to ascertain the cost incurred in providing the product or service for comparison with the sales price.
The difference between the cost and sales price amounts to profit, and the ratio of profit to sales price amounts to profit margin. Sales mix also tends to have an impact on the total inventory cost incurred. Likewise, the cost may change a company’s profit margin significantly.
Sales Mix Example
Consider a smartphone company planning to sell 1 million smartphones in the current financial year. The planned sales mix may include 200,000 smartphones of very low-profit margin 500,000 smartphones of medium profit smartphone models and 300,000 smartphone units of high-profit margins
The planned sales mix, in this case, is 20% for the low-profit smartphone models, 50% for the medium profit models, and 30% for the high-profit models. The information essentially shows that the smartphone company is planning to have a small operating loss by focusing more on medium, profit models, and high-profit models.
If the company ended up selling 950,000 smartphones, the disparity could translate to a huge loss or profit, depending on the number of models sold in each case. A more favorable sales mix translating to good profits could entail the company selling 15% of the low profits models 45% of the medium profit smartphones and 40% for the high-profit smartphones.
Sales Mix Calculation Importance
Management analyzes sales mix from time to time as it provides valuable information for determining when a company is likely to break even and generate optimum profits. The analysis is especially important when dealing with a variety of products whose profit margins vary.
A change in the mix of products sold can trigger a significant change in net profits even on the number of units sold remaining the same. It is for this reason that most firms elect to focus more on products with high product margins as opposed to low-profit product lines. Likewise, companies improve profit margins by focusing on products with the largest amount of profit associated with them.
Summary
Sales mix is essentially the ratio of sales of products or services sold compared to overall sales when dealing with a variety of products. The financial metric is of great importance in businesses selling a range of products with varying levels of profit margins, as a change in the mix of products can have a significant impact on the net profits.