How Mix Affects Profit Margins

On any given day, what you sell to whom changes – that’s what we mean by mix. You need to understand your mix to understand the impact on profit margins.

Posted By: Chris Jellen

You sell many different products to many different customers, and on any given day, what you sell to whom changes – that’s what we mean by mix. Every product and customer can have a different profit margin, so even if you have the same top-line sales from one month to the next, your profitability can vary considerably. You need to understand your mix.

Has this ever happened to you? Your margins go up, and it’s easy to point to this reason or that factor as the cause. Then your margins go down, and you halfheartedly point your finger at ‘mix’ but can’t really explain how or why it negatively impacted your profitability.

There is a way to measure how mix affects your profit margins. As part of an engagement, INSIGHT2PROFIT uses its proprietary DRIVE technology and price realization algorithms to determine whether the impact of mix is based on product, customer, region or other factors. We identify trends that you can either accept as ongoing or decide to implement a change approach going forward, such as:

Maybe over the course of a number of years, your product mix has subtly but measurably shifted toward lower-margin products – what changes might you make to drive sales of higher-margin items?
We might find that a sales manager has been aggressively offering promotions to his/her customers, causing profits to shrink even as revenues grow – are top-line sales or margins more important to you?
Promoting cross-selling may be a recommended option – have you looked at the opportunities you have to broaden the mix of products sold to individual customers?
Another action may be to consider implementing pricing tiers – if you are using a good/better/best pricing strategy, the mix of sales across tiers by salesperson, customer and geographies drives your profitability. Have you considered how a mix-oriented sales strategy, even without raising prices, can drive profit gains?

Ultimately, the goal is to be aware of and understand patterns in your mix. Use mix analytics to strategically grow the parts of your business that have more profitable mix.