Total revenue increased 10% year-over-year but gross profit declined by over 5%. Volume/margin/mix analysis breaks down the gross profit variance into three drivers: volume, margin, and mix. The analysis shows that while revenue and margins increased as expected, a negative mix impact from lower sales of higher margin products outweighed these positive factors, resulting in an overall gross profit decline. Understanding mix changes through this breakdown helps explain otherwise counterintuitive financial movements and prevents unhealthy business decisions driven by single metrics.

1. All in the mixBreaking down counter-intuitive movements

2. What do you do if year-on-year variances are
unexpected or counter-intuitive?
Is it possible to break down the underlying
drivers to better understand what’s going on?

3. Volume/margin/mix analysis is a powerful tool
to help understand such movements.
You may also find this breakdown referred to
as volume/price/mix analysis.

4. Note that the following slides analyse variances
between revenue and gross profit.
The analysis would also work for any other pairings
with a margin- or ratio-based relationship.
For example:
>> billings to contribution
>> turnover to EBIT
>> sales to commission
>> headcount to staff costs

5. Time for an example

6. Consider the following scenario:
Total year-on-year revenue has increased 10%
and gross margin has improved by at least 5%
for every product.

7. Obviously gross profit will be higher too, right?

8. Well, not necessarily.

9. Let’s dive into some numbers…
A worksheet containing the example numbers and workings can be downloaded from here.

10. Current year results Prior year results
Revenue
Gross
margin
Gross
profit Revenue
Gross
margin
Gross
profit
Product A 40 50% 20 100 45% 45
Product B 120 25% 30 10 20% 2
Product C 20 50% 10 90 40% 36
Product D 40 40% 16 80 35% 28
Product E 110 30% 33 20 20% 4
Total 330 33.0% 109 300 38.3% 115
A B C = A * B D E F = D * E
Here’s a year-on-year breakdown of gross profit.

11. Current year results Year-on-year variance
Revenue
Gross
margin
Gross
profit Revenue
Gross
margin
Gross
profit
Product A 40 50% 20
Product B 120 25% 30
Product C 20 50% 10
Product D 40 40% 16
Product E 110 30% 33
Total 330 33.0% 109
A B C H = A - D J = B - E K = C - F
Let’s look at the year-on-year variances.

12. Current year results Year-on-year variance
Revenue
Gross
margin
Gross
profit Revenue
Gross
margin
Gross
profit
Product A 40 50% 20 - 60
Product B 120 25% 30 + 110
Product C 20 50% 10 - 70
Product D 40 40% 16 - 40
Product E 110 30% 33 + 90
Total 330 33.0% 109 + 30
A B C H = A - D J = B - E K = C - F
In total we have 10% more revenue…

13. Current year results Year-on-year variance
Revenue
Gross
margin
Gross
profit Revenue
Gross
margin
Gross
profit
Product A 40 50% 20 - 60 + 5%
Product B 120 25% 30 + 110 + 5%
Product C 20 50% 10 - 70 + 10%
Product D 40 40% 16 - 40 + 5%
Product E 110 30% 33 + 90 + 10%
Total 330 33.0% 109 + 30
A B C H = A - D J = B - E K = C - F
…and higher margins for all products…

14. Current year results Year-on-year variance
Revenue
Gross
margin
Gross
profit Revenue
Gross
margin
Gross
profit
Product A 40 50% 20 - 60 + 5% - 25
Product B 120 25% 30 + 110 + 5% + 28
Product C 20 50% 10 - 70 + 10% - 26
Product D 40 40% 16 - 40 + 5% - 12
Product E 110 30% 33 + 90 + 10% + 29
Total 330 33.0% 109 + 30 - 5.3% - 6
A B C H = A - D J = B - E K = C - F
…but gross profit has fallen by over 5%.

15. How do we explain this drop in gross profit?

16. Before proceeding we need to calculate a few more
comparatives, starting with the current year’s total
revenue split by product based on prior year mix.
Current year
results
Prior year
results
Current year
@ prior
year mix
Current year
@ prior year mix
versus prior year
Current year
versus current year
@ prior year mix
Revenue Revenue Revenue Revenue Revenue
Product A 40 100
Product B 120 10
Product C 20 90
Product D 40 80
Product E 110 20
Total 330 300
A D L = D * ΣA / ΣD M = L - D N = A - L

17. We apportion the current year’s total revenue
using the same ratios as prior year - here’s how:
>> Product A revenue @ prior year mix is: €100 * €330 / €300
>> Product B revenue @ prior year mix is: €10 * €330 / €300
>> Product C etc…
Current year
results
Prior year
results
Current year
@ prior
year mix
Current year
@ prior year mix
versus prior year
Current year
versus current year
@ prior year mix
Revenue Revenue Revenue Revenue Revenue
Product A 40 100 110
Product B 120 10 11
Product C 20 90 99
Product D 40 80 88
Product E 110 20 22
Total 330 300 330
A D L = D * ΣA / ΣD M = L - D N = A - L

18. Current year
results
Prior year
results
Current year
@ prior
year mix
Current year
@ prior year mix
versus prior year
Current year
versus current year
@ prior year mix
Revenue Revenue Revenue Revenue Revenue
Product A 40 100 110 + 10 - 70
Product B 120 10 11 + 1 + 109
Product C 20 90 99 + 9 - 79
Product D 40 80 88 + 8 - 48
Product E 110 20 22 + 2 + 88
Total 330 300 330 + 30 -
A D L = D * ΣA / ΣD M = L - D N = A - L
This provides two further comparatives, namely
current year revenue @ prior year mix versus
current and prior year actual results:

19. Now we have the final comparatives, the
variance can be split into three drivers:
Volume Margin Mix

20. Volume is the most intuitive of the
three drivers; if revenue increases
then we’d also expect gross profit
to increase, and vice versa.

21. To calculate volume change, multiply the
year-on-year variance in revenue @ prior
year mix by prior year’s gross margin:
Prior year
results
Current year
@ prior year mix
versus prior year
Volume
change
Gross
margin Revenue
Gross
profit
Product A 45% + 10
Product B 20% + 1
Product C 40% + 9
Product D 35% + 8
Product E 20% + 2
Total 38.3% + 30
E M P = E * M

22. Prior year
results
Current year
@ prior year mix
versus prior year
Volume
change
Gross
margin Revenue
Gross
profit
Product A 45% + 10 + 4.5
Product B 20% + 1 + 0.2
Product C 40% + 9 + 3.6
Product D 35% + 8 + 2.8
Product E 20% + 2 + 0.4
Total 38.3% + 30 + 11.5
E M P = E * M
We see the expected, intuitive outcome;
gross profit increases in line with the
overall year-on-year revenue change.

23. Changes driven by margin are also
intuitive; if the gross margin for a
product increases then we’d expect
gross profit to increase, and vice versa.

24. To calculate margin change, multiply the
current year’s revenue by the year-on-
year variance in gross margin:
Current year
results
Year-on-year
variance
Margin
change
Revenue
Gross
margin
Gross
profit
Product A 40 + 5%
Product B 120 + 5%
Product C 20 + 10%
Product D 40 + 5%
Product E 110 + 10%
Total 330 - 5.3%
A H Q = A * H

25. Current year
results
Year-on-year
variance
Margin
change
Revenue
Gross
margin
Gross
profit
Product A 40 + 5% + 2.0
Product B 120 + 5% + 6.0
Product C 20 + 10% + 2.0
Product D 40 + 5% + 2.0
Product E 110 + 10% + 11.0
Total 330 - 5.3% + 23.0
A H Q = A * H
Again we see the expected, intuitive
outcome; gross profit increases for every
product as all margins have improved.

26. Changes due to mix are conceptually
harder to understand, but can still be
calculated and explained.
Here’s an example…

27. Consider two products:
Product A has 90% gross margin
Product B has 10% gross margin

28. Let’s assume each product generates
€100 revenue.
Product A yields €90 gross profit and
product B yields €10 gross profit.
That’s €200 revenue in total resulting
in €100 gross profit.
The average gross margin is 50%.

29. What if product A only generates €50
revenue but product B generates €150?
Now product A yields €45 gross profit
and product B yields €15 gross profit.
Total revenue remains as €200 and
each product’s gross margins doesn’t
change, but gross profit falls to €60.
Average gross margin is now just 30%.

30. The only thing that’s changed is the
mix in products, and yet the outcome
is 40% lower gross profit.

31. So what’s going on?
Is it possible to understand mix in a
more conceptional manner?

32. The key is to consider the relative size
of each product.
What if revenue rose by 10% for every
product? When compared against
total revenue, the proportional revenue
for each product is unchanged.
In such a scenario there would be no
impact from product mix.

33. What if revenue rose by 10% for every
product except Product A?
When compared against total revenue,
the proportional revenue would have
increased for all products with the
exception of Product A.
In such a scenario there would be an
adverse mix impact for Product A, but
an uplift for all other products.

34. So how do we calculate mix change?

35. To calculate mix change, multiply prior year’s
gross margin by the current year variance in
current year revenue @ prior year mix:
Prior year
results
Current year
versus current year
@ prior year mix
Mix
change
Gross
margin Revenue
Gross
profit
Product A 45% - 70
Product B 20% + 109
Product C 40% - 79
Product D 35% - 48
Product E 20% + 88
Total 38.3% -
E N R = E * N

36. Here we see both positive and negative
changes; the key driver is variance to
current year revenue @ prior year mix.
Prior year
results
Current year
versus current year
@ prior year mix
Mix
change
Gross
margin Revenue
Gross
profit
Product A 45% - 70 - 31.5
Product B 20% + 109 + 21.8
Product C 40% - 79 - 31.6
Product D 35% - 48 - 16.8
Product E 20% + 88 + 17.6
Total 38.3% - - 40.5
E N R = E * N

37. Where does this leave us and how do we best
interpret the outcome of such analysis?

38. Let’s bring all the variance drivers together…

39. Current year results Gross profit variance analysis
Revenue
Gross
margin
Gross
profit Volume Margin Mix Total
Product A 40 50% 20 + 4.5 + 2.0 - 31.5 - 25.0
Product B 120 25% 30 + 0.2 + 6.0 + 21.8 + 28.0
Product C 20 50% 10 + 3.6 + 2.0 - 31.6 - 26.0
Product D 40 40% 16 + 2.8 + 2.0 - 16.8 - 12.0
Product E 110 30% 33 + 0.4 + 11.0 + 17.6 + 29.0
Total 330 33.0% 109 + 11.5 + 23.0 - 40.5 - 6.0
A B C P Q R S = P + Q + R
We can clearly see the expected increases due
to higher revenue and increased gross margin…

40. Current year results Gross profit variance analysis
Revenue
Gross
margin
Gross
profit Volume Margin Mix Total
Product A 40 50% 20 + 4.5 + 2.0 - 31.5 - 25.0
Product B 120 25% 30 + 0.2 + 6.0 + 21.8 + 28.0
Product C 20 50% 10 + 3.6 + 2.0 - 31.6 - 26.0
Product D 40 40% 16 + 2.8 + 2.0 - 16.8 - 12.0
Product E 110 30% 33 + 0.4 + 11.0 + 17.6 + 29.0
Total 330 33.0% 109 + 11.5 + 23.0 - 40.5 - 6.0
A B C P Q R S = P + Q + R
…but what also becomes clear is the negative
mix impact driven particularly by relatively
lower revenues for higher margin products…

41. Current year results Gross profit variance analysis
Revenue
Gross
margin
Gross
profit Volume Margin Mix Total
Product A 40 50% 20 + 4.5 + 2.0 - 31.5 - 25.0
Product B 120 25% 30 + 0.2 + 6.0 + 21.8 + 28.0
Product C 20 50% 10 + 3.6 + 2.0 - 31.6 - 26.0
Product D 40 40% 16 + 2.8 + 2.0 - 16.8 - 12.0
Product E 110 30% 33 + 0.4 + 11.0 + 17.6 + 29.0
Total 330 33.0% 109 + 11.5 + 23.0 - 40.5 - 6.0
A B C P Q R S = P + Q + R
…and we can quickly conclude that, in this case,
mix is driving the overall negative movement.

42. How is this useful?

43. It’s very easy to focus on metrics and KPIs
that drive unhealthy business decisions.
In this example we saw double-digit revenue
growth masking an underlying decline in gross
profit (and most likely EBIT and cashflow too).

44. Including volume/margin/mix analysis in
dashboards and reports can empower
management. They are able to proactively
uncover and highlight areas of concern.
It will also allow you to highlight the same
issues and, ultimately, make you look good.

45. In addition, the analysis helps to explain
counter-intuitive and unexpected movements
in a way that makes them understood more
easily by the wider business.

46. The example also demonstrates why making
employees accountable for hitting just one
KPI or target can be dangerous. It can be
very easy to drive a specific KPI for personal
gain but to the detriment of the business.
Combining variance analysis with a balanced
scorecard is a strong counter to this issue.

47. Ultimately the analysis is another tool to add
to your repertoire, especially if you’re in a
growing business. Increased complexity
almost always creates unexpected variances
that need unpicking.

48. Even if you don’t use it on a day-to-day
basis, it might just end up proving useful
one day to help explain an otherwise
unexplainable variance.

49. Credits
Font: Orkney by Hanken Design
Image: free pour by Matan Segev
Image: measured pour by Magda Ehlers
Image: cheers by burst.shopify.com
Deck: created by Stephen James Smith
A worksheet containing the main example in the deck can be
downloaded from here:
https://www.dropbox.com/s/orn4lbx2q2b5j34