Sales price variance
Sales price variance is the difference between the actual sales price and expected sales price of a product.
Sales price variance is an important tool used by companies to measure their sales performance. It allows them to identify any discrepancies between their expected and actual sales prices, which can be caused by a variety of factors such as changes in the market or competitor pricing. By understanding the sales price variance, companies can make adjustments to their pricing strategy to ensure they are maximizing their profits. Additionally, understanding the sales price variance can also help companies identify areas of cost savings. For example, if a company is consistently selling its products for lower than their expected sales price, they can look for ways to reduce their costs or increase the value of their product to ensure they are able to cover their costs and make a profit.
Example of Sales price variance
Sales price variance can be calculated by comparing the actual sales price of a product to its expected sales price. For example, if a company expected to sell a product for $100 and it actually sold for $90, the sales price variance would be -$10. This would indicate that the actual sales price was lower than the expected sales price, resulting in a loss of $10.
In conclusion, sales price variance can be calculated by comparing the actual sales price of a product to its expected sales price. By understanding the sales price variance, companies can make adjustments to their pricing strategy to ensure they are maximizing their profits.
Formula of Sales price variance
The factors influencing Sales price variance can be divided into two categories: internal and external factors.
Internal factors include:
- Changes in the cost of production: If a company's cost of production increases, it may result in an increase in the expected sales price.
- Changes in demand: If the demand for a product increases, the company may need to increase their expected sales price to cover their costs.
- Changes in product quality: If a company improves the quality of their product, they may need to increase the expected sales price.
External factors include:
- Changes in the market: If the market price of a product changes, the company may need to adjust their expected sales price accordingly.
- Changes in competitor pricing: If a competitor lowers their prices, the company may need to lower their expected sales price to remain competitive.
When to use Sales price variance
Sales price variance is most useful for companies that produce products. Specifically, it can be used to measure a company's performance over time, compare their performance to competitors, and identify areas of cost savings. It can also be used to monitor changes in the market and adjust their pricing strategy accordingly. Additionally, it can be used to determine the most effective pricing strategy for a particular product or market.
Types of Sales price variance
Sales price variance can be divided into two main categories:
- Price-Related Variance: Price-related variance is the difference between the actual sales price and the expected sales price due to changes in the market or competitor pricing. This type of variance can be caused by many factors such as changes in demand, supply and competition.
- Cost-Related Variance: Cost-related variance is the difference between the actual sales price and the expected sales price due to changes in the costs of producing the product. This type of variance can be caused by many factors such as increases in material costs, labor costs, and other production costs.
Advantages of Sales price variance
- Sales price variance allows companies to measure their sales performance and identify discrepancies between their expected and actual sales prices. This helps companies adjust their pricing strategies to ensure they are maximizing their profits.
- By understanding the sales price variance, companies can also identify areas of cost savings. This allows them to find ways to reduce their costs or increase the value of their product to ensure they are able to cover their costs and make a profit.
- Additionally, sales price variance can also help companies better understand their customers and the market. They can use the information to adjust their pricing strategies to meet the changing needs of their customers.
Limitations of Sales price variance
Sales price variance has some limitations that should be taken into account when using it to measure sales performance. Firstly, the variance does not take into account other factors that can influence sales prices, such as discounts offered to customers or seasonal changes in demand. Additionally, the variance does not give information about the volume of sales, meaning it can be difficult to assess the overall profitability of a product. Finally, the variance does not account for any changes in the market that could affect prices. For these reasons, it is important to take into account other factors when evaluating sales performance.
Sales price variance is just one of the many approaches companies use to determine their sales performance. Other approaches include:
- Cost of Goods Sold (COGS): This approach takes into account the cost of the goods sold in order to determine the company's sales performance.
- Gross Profit Margin: This approach looks at the total revenue of the company and subtracts the cost of goods sold to calculate the gross profit margin.
- Price Elasticity: This approach looks at how changes in price affect the demand for a product. Companies can use this information to determine the optimal price for a product.
In conclusion, there are a variety of approaches companies can use to measure their sales performance. Sales price variance is just one of these approaches and can be used to identify areas of cost savings and ensure that companies are maximizing their profits. Additionally, other approaches such as COGS, gross profit margin, and price elasticity can also be used to measure sales performance.
Sales price variance — recommended articles |
Sales mix — Overhead rate — Marginal revenue — Price sensitivity — Real cost — Value in use — Cross elasticity of demand — Sales volume variance — Demand curve shift |
References
- Bawa K., Shoemaker B. (2004), The Effects of Free Sample Promotions on Incremental Brand Sales, "Marketing Science", Vol. 23
- Binet L., Puri G., Deboo M. (2008), Measuring Marketing Payback. A best practice guide
- Lautman M.R., Pauwels K. (2009), What is important? Identyfing Metrics that Matter
- Model N (2016), Using Channel Key Performance Indicators to Grow Channel Sales
- Qvative Group (2017), Improving marketing efficiency through incremental measurement: Finding the direct links between marketing spending and sales results
- Stochastic Solutions Limited (2007), Generating Incremental Sales: Maximizing the incremental impact of cross-selling, up-selling and deep-selling through uplift modelling