Price, volume and mix: the only three ways revenue moves

A distributor we worked with last year opened a board deck with one line: revenue up 15.9 percent. The room relaxed. Six months later they were out of working capital.

Revenue is a product of two things you control and one thing you usually do not notice. Every ringgit of movement resolves into exactly three effects, and they behave nothing alike.

The three effects

Price is what you charge. A price effect flows almost entirely to gross profit because the cost of the unit did not change. It is the most valuable ringgit of growth you can earn, and the one customers notice first.

Volume is how many units move. A volume effect brings its own cost with it. You keep the gross margin percentage, so profit grows, but so does working capital, warehouse space and delivery cost.

Mix is which products moved. Mix is the effect nobody budgets for. If growth came from your cheapest line, revenue rises while blended margin falls. Nothing on the income statement flags it.

Why mix hides

Mix does not appear on a P&L. It has no line item. It shows up as a slow drift in gross margin percentage that gets explained away as input cost pressure for three or four quarters in a row.

• Gross margin fell 40 basis points, so someone blames raw material prices.
• Raw material prices were flat, so someone blames freight.
• Freight was flat, and by now nobody is looking.

We were celebrating a number that was quietly getting more expensive to produce.Finance manager, Klang Valley distributor

How to run the split yourself

You need unit volumes by SKU for both periods, not just revenue. Most businesses have this and have never joined it to the income statement.

1. Price effect. Change in average price, multiplied by prior-period volume.
2. Volume effect. Change in total volume, multiplied by prior-period average price.
3. Mix effect. The residual. If your three effects do not sum exactly to the revenue change, the residual is mix, and it is real.

Run it monthly, not annually. Mix drifts slowly enough that a yearly view catches it a year late.