The sales mix analysis is important because it can reveal important information about profitable products, not profitable products, products that are top performers, products that sell in very small quantities, products which are sold generally together, etc.
The overall goal of this approach is for management to define the optimal mix of products which should be sold by the company and identify new potential products that can be added to the product portfolio. In most cases business organizations will try to maximize the overall profitability by creating a sales mix of products that support overall profits and not individual profitability. Generally the common wisdom and common sense is to push with high margin products and get rid of low margin products and services however this is not always the truth when it comes to overall profit.
How to optimize your sales mix to maximize profits?
Follow these 3 sales mix analysis strategies:
1. Individual product profit should be measured based on activity based costing ABC analysis and not only based on gross profit margins. Different products require different activities and company’s resources and as a result consume different amounts of indirect costs. Without using activity based costing it is difficult to know the real total cost of each product which makes your sales mix analysis not really effective. By ignoring ABC and focusing on margins you will focus on the wrong directions and strategies for your overall profitability because sometimes high margin products can consume high activity cost and low margin products can be more profitable at the net profit level because they don’t require any activities and resources..
2. In addition to individual product profitability it is crucial to understand how customers purchase your products. You can use your sales database with historical sales transactions to identify the correlation between different products sold together. Customers who buy more than one product can be identified and the sales mix can be analyzed. In many cases there will be mix of two or more products generally sold together or mix of service with a product sold together. In many cases one of the product in the mix can be a high margin and the other one can be a low margin product so the focus should be to maximize overall profitability and avoid sub optimization.
3. The third ingredient for successful sales mix analysis is the trend analysis. It is important for the management to be able to identify any trends or changes in the sales mix over time. Customer preferences change continuously, new products are introduced by the company, prices change and competitors develop new products. The trends will reveal how the consumption of products has changed over the last few months. Based on this analysis the company can make decisions how to improve its current sales mix by introducing new products, using new product bundles, introducing new services, redefining pricing and repositioning some of its products in order to maximize overall profit.
The three important components of successful sales mix analysis explained above will give you the right focus in your analysis. You need to measure the real profitability of each individual product by using ABC, analyze the mix of products that generally sell together and their overall profitability and in addition continuously track and monitor the sales mix trends and changes in the way customers buy your products. The single most important advice in sales mix analysis is to focus on optimizing and maximizing the overall profitability and avoid sub optimization.
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