Financial Management: Volume/Price/Mix

Post 2 in the series on management.

Now on Substack.

Decomposing Revenue Change

Regardless of whether you are a retailer or an FMCG manufacturer, an airline or a hotel owner, an ad agency CEO or a news publisher, a lawyer or a doctor, if you want your company to make more revenue next year than you made this year, you can do one of two things (or, ideally, both): sell more goods (or services), or make more money per good you sell than you did this year.

Shockingly, many people overlook this basic fact — I know, because I have asked questions around it in interviews. Even when people get it, most are not sure how to breakdown revenue growth into these two drivers (volume and revenue/unit (note that I’m avoiding using “price” — the reason will become clear further on)).

Imagine than in year 1, you sell V1 units for P1 dollars each. Then, your revenue for Y1 is equal to P1 x V1, represented by the gray box in the chart below:

Figure 1

Now suppose that in year 2, you sell V2 units for P2 each. Your revenue for Y2 is P2 x V2, and your revenue growth is (P2 x V2) — (P1 x V1).

But how much of this growth came from the increase in revenue per unit, and how much from the increase in volume? This is a rhetorical question, as…