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Chapter 1 of 5 · 11 min

Revenue build: price, volume and mix

Growth is three things: charging more, selling more, and selling a different blend. Split it, because they are not worth the same.

By the end of this chapter you can
  • Build revenue from price and volume, product by product
  • Split the change in revenue into price, volume and mix
  • Find the price rise a revenue target needs at flat volume
  • Say which kind of growth reaches EBITDA and which a buyer pays for
1

The intuition

A coffee shop sells lattes and filter coffee. Takings went up this year. Maybe it raised prices. Maybe more customers came in. Or maybe the same customers switched from filter coffee to lattes, which cost more. Each story leads to a different next step, so the owner wants to know how much of the rise came from each.

A sponsor splits growth the same way: price (charging more for the same units), volume (selling more units) and mix (selling a richer or poorer blend of products at the old prices).

The key idea

Price effect = price rises × new volumes. Volume effect = change in total units × old average price. Mix = new volumes at old prices − new total units at the old average price. The three add to the change in revenue.

2

Why it works

  • The conventions here: two products; one price rise on both; price measured on the new volumes, volume at the old average price, and mix is what is left. This is the standard split.
  • The old average price is revenue ÷ total units. Volume at that price assumes the blend did not change; mix corrects for the fact that it did.
  • Mix is positive when the expensive product's share of units rises, and negative when the cheap product's does. Mix is zero when both products grow at the same rate.
  • Price drops straight to EBITDA. No extra units means no extra variable cost. Volume brings its variable cost with it.
  • Buyers often pay more for volume. It shows demand; a price rise may not repeat. The best growth has both.
  • Interrogate mix. A deliberate move upmarket is strategy; a cheap product losing share to a competitor is a problem that happens to flatter the average price.
Premium $100 × 2M units, standard $25 × 8M units; prices rise 4%; premium volume +10%, standard flat
Revenue: 200 + 200400; average price $40
Next year: $104 × 2.2 + $26 × 8436.8, up 36.8
Price: $4 × 2.2 + $1 × 816.8
Volume: (10.2 − 10) × $408.0
Mix: 2.2 × $100 + 8 × $25 − 10.2 × $4012.0
Check: 16.8 + 8.0 + 12.036.8

For 8% growth at flat volume and mix: 32 ÷ 10M units = $3.20 a unit, an 8% price rise.

3

The formulas

Revenue = Σ price × volume

Product by product.

Old average price = old revenue ÷ old total units

What the average unit sold for.

Price effect = Σ (new price − old price) × new volume

Charging more for this year's units.

Volume effect = (new total units − old total units) × old average price

More units, at the old blend.

Mix effect = Σ new volume × old price − new total units × old average price

The blend changed.

Price rise for a target at flat volume = (target − revenue) ÷ total units

All growth from price.

4

Worked example

Work out the old average price first. Then price, then volume, and mix is what is left.

Drawing the numbers…
5

See it move

Same company and the same prices. Change the price rise and how fast each product's volume grows.

Drawing the numbers…
Try this
  • Raise the price rise. The price bar grows; volume and mix do not move.
  • Raise premium volume growth. Volume and mix both grow: more units, and a richer blend.
  • Raise standard volume growth. Volume grows but mix falls: more units, but more of the cheap one.
  • Set both volume growths equal. Mix is exactly zero.
6

Run it backwards

Same company, reversed: the plan needs a set revenue growth, but volume and mix will be flat. How much must the average price rise?

Drawing the numbers…

With the same units in the same blend, every extra dollar must come from price. Divide the extra revenue by the number of units.

As a percentage it equals the revenue growth itself, which makes the diligence question simple: has this company ever pushed through a rise that big without losing volume?

7

Traps

Measuring volume with each product's own price.
That buries mix inside volume. Use the old average price for volume, and let mix pick up the change in blend.
Measuring price on the old volumes.
In this convention price uses the new volumes. Choose one convention and check the three add up.
Calling all growth equal.
Price reaches EBITDA in full; volume brings variable cost. Buyers often pay more for volume.
Assuming positive mix is good news.
Ask why the blend changed. Losing the cheap product to a competitor also shows as positive mix.
Planning a price rise with no volume loss.
Check the company's history of price rises and what customers did.
8

Say it in the interview

The interviewer asks

“How would you break down a company's revenue growth?”

Say yours out loud first, then compare.
9

Check yourself

4 fresh questions, with new numbers. Answer each one correctly to finish the chapter. Get one wrong and you will see the full working, then you can try it again with new numbers.

Answers within 1% are marked right. Type the number; $, %, x and M are fine. First tries count toward Learned: the topic is Learned once every chapter is done and 75% of first tries were right.

0 of 4
Drawing your questions…
Remember
  • Price + volume + mix = change in revenue.
  • Volume at the old average price; mix is the rest.
  • Mix is zero when every product grows at the same rate.
  • Price reaches EBITDA in full; volume brings cost.