What is a 'Sales Mix'
Sales mix is a calculation that determines the proportion of each product a business sells, relative to total sales. Sales mix is important, because some products or services may be more profitable than others, and if a company's sales mix changes, its profits also change. Managing sales mix is a tool to maximize company profit.
BREAKING DOWN 'Sales Mix'Analysts and investors may look at a company's sales mix to see if the company's prospects for overall growth and profitability look promising. If profits are flat or declining, the company can de-emphasize or even stop selling a low-profit product and focus on increasing sales of a high-profit product or service.
Factoring in Profit Margin
Profit margin is defined as net income divided by sales, and this ratio is a useful tool to compare the relative profitability of two products with different retail sales prices. Assume, for example, XYZ Hardware generates net income of $15 on a lawnmower that sells for $300, and sells a $10 hammer that produces a $2 profit. The profit margin on the hammer is 20%, or $2 divided by $10, while the mower only generates a 5% profit margin, or $15 divided by $300. Profit margin removes the sales price in dollars as a variable and allows the owner to compare products based on profit per sales dollar. If XYZ’s profits are slowing, the firm may shift the marketing and sales budget to promote the products that offer the highest profit margin.
How Target Net Income Works
Sales mix can be used to plan business results and reach a target level of net income. Assume, for example, XYZ wants to earn $20,000 for the month by generating $200,000 in sales, and decides to plug in different assumptions for the sales mix to determine the net income figure. As XYZ shifts the product mix toward products with a higher profit margin, the profit for every dollar sold increases, along with net income.
Examples of Inventory Cost Issues
Sales mix also has an impact on the total inventory cost incurred, and that cost may change company profit by a meaningful amount. If, for example, XYZ decides to stock more lawn mowers to meet spring lawn demand, the firm earns a lower profit margin than hammers and other products. Also, holding more lawn mowers requires more warehouse space and a larger cash investment in inventory, as well as more costs to move mowers into the store and out to customer vehicles. Carrying larger, more expensive products generates higher inventory costs and requires a larger cash investment.