Graphical illustration of Volume and Price effects

The main job of a business controller is to understand the business and present that understanding in a way that triggers reflection, action and change. 

So, how to go about understanding a business? In this post, I will illustrate the simple example of understanding a change in sales revenue by breaking it down into volume and price effects.

Sales revenue is the product of volume and price, so these are the business drivers. Now, when these drivers change, we quantify the effect of those changes and we call these a volume and a price effect.

Let's assume the very simple case of one product in the beginning of a period and in the end of it. Something like this:

Product A sold quantity in the beginning of the period is 5 at a price of 5, thus revenue of 25. At the end of the period, the sales were 3 at a price of 5, revenue 15. Revenue difference -10.

Product A sold quantity in the beginning of the period is 5 at a price of 5, thus revenue of 25. At the end of the period, the sales were 3 at a price of 5, revenue 15. Revenue difference -10.

Plotted on a chart, it would look something like this:

Volume on the X-axis and Price on the Y-axis

Volume on the X-axis and Price on the Y-axis

The sales variance of -10 is solely due to the change in volume, since the price remained unchanged. Therefore, we can say that we have a Volume Effect of -10.

Let's assume another situation where Price is changing driver:

Product A sold quantity in the beginning of the period is 5 at a price of 5, thus revenue of 25. At the end of the period, the sales were 5 at a price of 4, revenue 20. Revenue difference -5.

Product A sold quantity in the beginning of the period is 5 at a price of 5, thus revenue of 25. At the end of the period, the sales were 5 at a price of 4, revenue 20. Revenue difference -5.

Volume on the X-axis and Price on the Y-axis

Volume on the X-axis and Price on the Y-axis

The sales variance of -10 is solely due to the change in price, since the volume remained unchanged. Therefore, we can say that we have a Price Effect of -5.

Easy so far, let's explore the situation in which both Volume and Price change.

The Sales Variance is -13. In our previous calculations we identified a  Volume Effect  without price change of -10 and a  Price Effect  without volume change of -5, summing up to -15. But our difference when both change is -13 and we can even see on the graph a "common area" of -2 [Volume] x -1 [Price] = -2. What is that, is it volume or is it price? Or is it something else?  In fact, that "common area" is what we want it to be, either Volume or Price Effect, in other words, is a matter of practice. Both answers below are correct, what I am using myself is the first version where the "common area" is attributed to the Volume Effect.

The Sales Variance is -13. In our previous calculations we identified a Volume Effect without price change of -10 and a Price Effect without volume change of -5, summing up to -15. But our difference when both change is -13 and we can even see on the graph a "common area" of -2 [Volume] x -1 [Price] = -2. What is that, is it volume or is it price? Or is it something else?

In fact, that "common area" is what we want it to be, either Volume or Price Effect, in other words, is a matter of practice. Both answers below are correct, what I am using myself is the first version where the "common area" is attributed to the Volume Effect.

By using this practice, the calculation of the Volume and Price Effect is:

Volume Effect = Volume Difference x Initial Price [(V1-V0)xP0]

Price Effect = Price Difference x New Volume [(P1-P0)xV1]

Here is another example of Volume-Price Effects when the direction is opposite:

To conclude, when we have one product, the sales revenue variance can always be broken down into Volume and Price Effects. The point with doing this kind of calculation is to isolate the impact of the two drivers and make it easier to see trends over time. 

An analytical view on the TIME resource

What you can measure is not worth much these days