In today’s fast-paced business world, understanding the true drivers behind revenue growth or decline is more important than ever. Companies often see changes in their sales figures but struggle to pinpoint exactly what is causing them. Is it higher prices? Selling more products? Or a shift in the types of products being sold?
This is where the concept of Price Volume Mix (PVM) comes into play. PVM is a powerful tool that helps break down revenue changes into three key components: price, volume, and mix. By analyzing these elements separately, businesses can gain valuable insights into their performance and make more informed strategic decisions.
In this article, we’ll explore what Price Volume Mix is, why it’s important, how it works, and how you can use it to better understand and drive your business success.
What is Price Volume Mix (PVM)?
Price Volume Mix (PVM) is a method used to analyze changes in a company’s revenue by breaking them down into three distinct effects: price, volume, and mix. Rather than looking at revenue growth or decline as a single number, PVM helps businesses understand how and why that change has occurred.
In simple terms, it answers questions like: Are we making more money because we sold more units? Because we increased our prices? Or because we sold a different combination of products?
The Three Components Explained
1. Price Effect
The price effect measures the impact of changes in the selling price of products or services.
If the number of units sold stays the same but the price increases, revenue grows purely due to the price effect. Example: A bakery increases the price of a product from €1 to €2 and sells the same number of units, leading to higher revenue from price alone.
2. Volume Effect
The volume effect captures the impact of selling more or fewer units, assuming prices stay constant. When more products are sold at the same price, the additional revenue is only given by volume effect. Example: A bakery keeps the price of its croissants at €1.2 but sells 50 more units compared to the target period.
3. Mix Effect
The mix effect reflects changes in the proportion of different products sold, which may have different prices or profit margins.
If a company sells a greater share of higher-priced or more profitable products, even if the total number of units stays the same, this shift will affect overall revenue.
Example: A bakery starts selling more cakes compared to basic croissants, boosting the average sales value, or put it differently the average selling price.
Why is PVM Analysis Important?
Understanding PVM is crucial for businesses because it provides deeper insights into performance beyond just “sales are up” or “sales are down.”
- Strategic Pricing: Knowing how price changes affect revenue can guide better pricing strategies, and this lead to other questions like price elasticity
- Sales Focus: Identifying which products drive volume growth helps sales and marketing teams target efforts effectively.
- Product Management: Understanding mix shifts can influence product development and inventory management.
Without a PVM analysis, companies risk misinterpreting revenue changes, which could lead to poor business decisions.
How to Perform a Basic PVM Analysis
Price Impact = (Current Price – Previous Price) × Previous Volume
Volume Impact = (Current Volume – Previous Volume) × Previous Price
Mix Effect = (Current Volume – Previous Volume) * (Current Price – Previous Price)Here’s an example featuring a French bakery. We’ll look at the change in revenue between two periods — in this case, an increase of €1,445. What explains the difference? Let’s dive in with the PVM!
| Previous Period | Current Period | Delta | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Product | Price in € | Volume | Revenue € | Price in € | Volume | Revenue € | Price in € | Volume | Revenue € |
| Croissant | 2 | 1,000 | 2,000 | 2.2 | 1,100 | 2,420 | 0.20 | 100 | 420 |
| Pain au chocolat | 2.2 | 800 | 1,760 | 2.3 | 850 | 1,955 | 0.10 | 50 | 195 |
| Baguette tradition | 1.3 | 1,500 | 1,950 | 1.4 | 1,600 | 2,240 | 0.10 | 100 | 290 |
| Mille-feuille | 4.5 | 250 | 1,125 | 4.7 | 300 | 1,410 | 0.20 | 50 | 285 |
| Pain aux raisins | 2.5 | 600 | 1,500 | 2.7 | 650 | 1,755 | 0.20 | 50 | 255 |
| Total | 2.01 | 4,150 | 8,335 | 2.17 | 4,500 | 9,780 | 0.16 | 350 | 1,445 |
| Product | Price effect | Volume effect | Mix Effect | Revenue Impact |
|---|---|---|---|---|
| Croissant | 200 | 200 | 20 | 420 |
| Pain au chocolat | 80 | 110 | 5 | 195 |
| Baguette tradition | 150 | 130 | 10 | 290 |
| Mille-feuille | 50 | 225 | 10 | 285 |
| Pain aux raisins | 120 | 125 | 10 | 255 |
| Total | 600 | 790 | 55 | 1445 |
Key Findings
As we can see, revenue increased due to both volume and price effects, resulting in an overall positive mix. The two main volume-driven products — croissants and baguettes — saw price increases of 10% and 8%, respectively, accounting for nearly half of the total revenue growth. On the other hand, the Mille-feuille, although the most expensive item on the menu, is sold in lower quantities. This means that even a small price increase can significantly impact revenue if volume remains steady. In this case, both price and volume increased, leading to a 25% jump in revenue for that item.
Overall, the data suggests that price increases also led to higher volumes — an indication of elastic demand. From a market perspective, this implies limited competition and strong customer willingness to pay more for what they perceive as a distinctive or high-quality product.