What is sales mix? Definition, formula, and best practices

Knowing whether or not your company is making a profit is essential to building a successful business strategy. The real question is: Do you know why your company is or isn’t profitable?

This is the essence of the sales mix. Sales mix digs deep into the individual percentages and profits of your products so you can determine what stays, what goes, and what gets an update. Not every product is a best-seller, but that doesn’t mean it can’t hold value for the company.

In this piece, we’ll define sales mix and discuss best practices. We’ll also walk you through a specific example that illustrates how to determine the course of action for a product through sales mix, sales mix percentage, contribution margin, and sales mix variance.

What is sales mix?

Most commonly, sales mix refers to the proportion of sales a single product accounts for in a company’s total sales. It is used to determine which products are performing well and which products are sinking so that inventory adjustments can be made down the line.

It’s worth noting that sales mix can also refer to the variety of products sold by a company (or the “mix” of “sales,” if you will), but for business purposes, we’re going to use the definition above.

Sales mix is one of the more fast-paced sales analytics. Because products and inventory constantly move at different speeds depending on advertising, time of year, and societal circumstances, sales managers must calculate sales mix regularly to ensure the current products are meeting sales goals.

It sounds complicated, but as we’ll see in the next section, the formula is quite simple. It’s keeping tabs on product changes and remembering to do the calculations that can get overwhelming and cause revenue losses.

How to calculate sales mix

There are several ways to calculate sales mix; it depends on what aspect of sales you’re looking to analyze. Sales mix is all about understanding profit margin, which is the percentage of a product’s profit divided by its sale price. You can then compare the profit margins of multiple products to understand your sales mix.

Below, we’ll take a look at the sales mix formula, sales mix percentage, sales mix contribution margin, and sales mix variance for one company analyzing its products.

Sales mix formula

Let’s meet our sporting goods company: Activa.

This company has been doing well, but it is currently experiencing lower net sales and wants to examine its sales mix to pinpoint the problem. Activa decides to compare its two most popular products from the previous year.

Focused solely on these initial profit margins, Activa’s sales mix goal should be to increase sales of the weight-lifting set. The profit itself is smaller, but the profit margin is larger by 9 percent. If the company wasn’t looking to solve a problem but instead was simply looking at how to allocate advertising, this would be a great place to stop.

Based on this sales mix, sales managers can go to marketing and advise that more advertising budget be allocated to the weight-lifting set than to the heat-tech running jacket for the next quarter. Even though the price of the product is lower, the profit margin is higher, so the company will make more profit overall by selling weight-lifting sets than heat-tech running jackets.

Sales mix percentage

Sales mix percentage is the number of one product’s sales divided by the number of total products sold. There are two sales mix percentages to be aware of: projected and current.

Projected sales mix percentages are based on the time period of the last time sales mix was calculated. For our sporting goods company, let’s say it calculated sales mix for the previous quarter and the numbers were as follows:

This indicates that for the next quarter (unless a drastic change is made), the company can forecast 10 percent of its sales will come from heat-tech running jackets and 16 percent of its sales will come from basic weight-lifting sets. But keep in mind, this number only refers to the number of units sold, not the impact of the units on revenue.

Sales mix contribution margin

The sales mix contribution margin is the amount of actual dollars a company sees from the sales mix percentage in a given time period. This metric is used to calculate the number of product units a company needs to sell in order to remain at its sales mix goal.

Based on the sales mix percentages above, we calculate the following:

With the contribution margin, we can then calculate the following:

This is where the crucial discovery occurs. Product A sold 500 units, and that was enough to hit the necessary sales mix percentage. Product B, however, sold 800 units when it needed to sell 895 units to meet its sales mix percentage. That’s a difference of 95 units, or 2 percent in sales mix percentage (14 percent instead of 16 percent).

This is why profit margin matters and why sales mix percentage isn’t always the most accurate indication of product revenue health. But when in doubt, we can account for these discrepancies with sales mix variance.

Sales mix variance

Sales mix variance accounts for the difference between the sales mix a company has budgeted for and its actual sales mix at the end of a certain time period. Ideally, you want your sales mix variance to be positive. But if it’s negative, you can also use that information to determine the next steps with your sales team or inventory planning team.

Here’s the full sales mix variance formula:

We went over how to find these numbers above, but just as a reminder:

• Actual sales mix percentage = the calculated sales mix percentage at the end of the given time period.
  Budgeted sales mix percentage = the projected sales mix percentage at the end of the previous time period.
  Profit margin per unit = the price of the product minus the cost to the company to produce the product. (This number is represented in a dollar amount, not a percentage.)

Now, let’s get back to our sporting goods store example.

Sales mix variance example

We’ll calculate the sales mix variance for products A and B below.

As you can see, Product A broke even with a variance of 0 while Product B ended the quarter with an unfavorable variance of -$1,360.

After all these calculations, we found the problem. Now, we have to find a solution.

Sales mix best practices

You’ve finished the calculations above and have a pile of numbers in front of you—now what? Sales mix is like any other sales metric. It’s not worth very much unless you know how to use the results to shift sales practices and plans within the company.

Step 1: Evaluate the situation

Basic weight-lifting sets may have spent a year as a best-selling product, but now they’re less popular and costing the company more money to produce than they’re returning in profits. Why?

There could be a number of reasons, but one major factor may be social circumstances. During the pandemic, people couldn’t (or didn’t feel safe and wouldn’t) go to their local gyms. People around the globe spent a lot of money on home fitness gear that they otherwise may not have purchased. With the reopening, however, many returned to their “normal” routines and put personal equipment away. The pain point ceased to exist.

Step 2: Go to marketing

Assuming fewer people are going to be buying weight sets, the next step is to make a product decision. There are two ways this could go:

1. Increase marketing for the weight sets, as they have a high profit margin and are worth pushing.

2. Pull back on the weight sets and redirect inventory budget elsewhere—perhaps to travel gear and backpacks as people start traveling again.

No matter what decision is made, a clear plan forward lets your company try a new tactic and reevaluate down the line. Who knows? With a smart marketing plan, weight sets could move back into a best-seller slot. It’s all about avoiding stagnancy and moving away from decisions that are actively hurting your bottom line.

Combine your data with a CRM for maximum gains

Another way to make informed inventory decisions is to integrate your sales mix data with a state-of-the-art CRM like Zendesk Sell. When you can compare product and pricing statistics against customer purchase histories and preferences, you can make smart choices about where to head next as a company.

With Zendesk Sell, you can track every aspect of your customer journey and sales pipeline so you know exactly where problems are occurring. You can also create a seamless relationship between sales and marketing, thanks to the robust collaboration and communication tools.

As a business, your biggest asset is detailed data about your products and customers. Request a demo today, and watch Zendesk find the solutions to your sales mix at the touch of a button.