Studies show if you want to reach a goal, monitoring your results drastically improves your chances of success.
Moreover, “Your chances of success are even more likely if you report your progress publicly or physically record it.”
No one’s asking you to shout about a massive sales quota from the rooftops.
However, when you track your sales against what you expect to sell, you not only increase your chances of seeing good results, but you also get a whole lot of valuable insight in the process. That’s why it's crucial to track multiple metrics in the sales process.
Sales volume variance (SVV) is an important metric to track for both campaigns and individual products. In pursuit of meeting their company’s financial goals, sales managers need a deep understanding of SVV to better analyze and report back on the company’s wins and losses, new products, and any other sales goals.
Today, we’ll explain sales volume variance, why it matters, and how to perform sales variance analysis. We’ll also discuss a few examples to help you visualize this term.
What is Sales Volume Variance?
This metric is fundamental to tracking your sales performance.
When you subtract budgeted sales from actual sales, this leads to a key performance indicator in the form of whether the final number is positive or negative.
If you sell more than you budget for, you’ll see a positive number. If you budget more than you sell, the result will be negative. That makes sense in terms of sales revenue, as you’ll likely have to adjust the selling price and sell those extra units off at a loss.
Some of the most common reasons for seeing positive or negative numbers in your sales volume variance formula include:
- A bad market: When misfortune hits everyone at once, your sales are likely to plummet. Think a recession in which unemployment soars to double digits, or pandemics before the economic stimulus payments kick in.
- Stimulus money: Oh, hello, COVID-19 lessons! Did you know people start spending more when everyone gets a buttload of cash? (And yes, a buttload is an actual measurement.) That means they’re likelier to buy your notepads, sports jerseys, or marketing software.
- Competition: Did your competitor come out with nearly the exact same product this quarter? Your sales volume variance is likely to reflect that, and not in a good way.
- Incompetence: We hate to say it, but it happens. If your team doesn’t know what they’re doing or isn’t using the right software, it’s possible you’re not forecasting sales accurately. And that’s not good – which is what makes sales volume variance such an important sales metric.
Emphasizing the significance of sales metrics like sales volume variance mirrors the attention placed on understanding total contract value in the broader realm of business growth.
Is Sales Volume Variance an Important Metric?
Yes, based on the fact that we've written an entire post about it, SVV is an important metrics for top sales teams.
Here's why: Sales volume variance is useful to track your progress, see how well your sales forecasting is working, and its integral component in the yearly operating statement. Your financial statement includes such important data as:
- Income and earnings
- Actual and anticipated revenue
- Actual and anticipated expenses
- Profits and losses
- Credits and debits
- Budgets, price points, and overhead costs for the previous year
It doesn’t take a rocket scientist to see how actual and anticipated sales leads to figures like actual and anticipated revenue.
If you want a meaningful operating statement, then metrics such as sales volume variance are critical. It’s the only way to learn lessons about past sales forecasts and marketing campaigns, and apply them to the future.
To do that, of course, you need to know how to do the math.
How to Calculate Sales Volume Variance
If you want to keep your pipeline full, you must know whether your predictions are reasonable, and that means frequent comparisons of budgeted and actual sales. Enter sales variance calculations.
It’s important to know how to calculate sales volume variance, because it’s an integral metric in determining how well your campaigns and products are performing. Once you do this routinely in-house, you’ll understand how richly rewarding and actionable this information is, and you’ll never look back.
There are different methods for figuring sales volume variance, and how your company calculates it depends on the costing technique you opt to use. We will take a look at three variations below, but in each case, you will notice that the main equation stays the same. It is:
 |
How you calculate the cost per unit (a standard cost set by your team) depends on which of the three following models you choose. However, in each case, you are always subtracting the budgeted units from the actual number of units sold.
Whether you exceed projected sales (favorable sales) or fall short (adverse sales), you’ll want to know how to account for them using costs or profits, so let’s take a look at those formulas now.
Using Absorption Costing to Determine SVV
In the absorption costing model, you figure out how much profit each unit contributes to your company. Determine the profit per unit by totaling up all the costs that go into an individual unit, then subtracting that from the price of the unit at retail. This works even for non-physical products. You would account for the price of the service and subtract everything that goes in (overhead, salaries, etc.), even if it is a digital product or service.
As with all models, you subtract the budgeted units from the number of units, then multiply that by the profit per unit. (Note profit per unit may vary if you put items on sale at some point in the year.) The total number is the amount of profit your company sees from all the products you’ve sold, or all the products you’ve sold in a particular category.
For example, if product A sells for $15, and takes $5 to manufacture, then you’ve earned a $10 profit. If you sell 1,000 of them, then you’ve made $10,000.
And if you thought your actual sales volume would be 800 units, then your actual revenue leads to a sales volume variance of:
(1,000 – 800) x ($10) = $2,000
Using the Marginal Costing Method to Determine SVV
In marginal costing, the sales price variance is calculated using standard contribution. You calculate standard price by subtracting total cost of production (variable costs, expected and not) from total revenue, then dividing the number of units. This is the amount, positive or negative, that each item deviated from budgeted profit: your standard profit.
Let’s say your total expenses were $10,000 and gross profit was $20,000. Net sales, or actual quantity sold, was 1,000 units.
That means each item has a standard contribution of $10 ($20,000 - $10,000 = $10,000, which divided by 1,000 = $10.) You then use this number to perform the sales variance calculation for product A like so:
(1,000 – 800) x ($10) = $2,000
Using Revenue Variation to Determine SVV
In this last model, the equation is based strictly on the budgeted price of each unit, and therefore is the most basic of all because you don’t have to account for variable costs, as in the first two methods.
The equation thus uses the full price of the product at market, or in the case of product A, $15:
(1,000 – 800) x ($15) = $3,000
Note that while the revenue variation model is a great way to determine your total intake from a particular product or service, or your entire line, it does not capture costs. Beware of treating this like your net profit!
Another important metric to consider alongside revenue variation is net revenue retention (NRR). NRR takes into account not only the revenue generated from initial sales but also additional revenue from customer renewals, upsells, and expansions. It provides a more comprehensive view of your business's ability to retain and grow revenue from your existing customer base.
What is Sales Quantity Variance?
Sales volume variance is sometimes confused with sales quantity variance (SQV). However, they are slightly different, though both are necessary for a true understanding of your sales record. To wit:
- Sales volume variance is a financial figure that reflects the amount of money you brought in versus the amount of money you expected to make
- Sales quantity variance is a measure of the number of units you sold versus how many you expected to sell
You need to know where your money is coming from, whether that’s from a few huge sales you worked toward all year (say, large components for a space station) or oodles of smaller sales in a constant stream. Factors that affect sales quantity variance include:
- Market characteristics, as with sales volume
- How costly your units are
- How long it typically takes to move someone from the top to the bottom of the sales funnel (considerably longer for space station parts than wine glasses, for example!)
- As a consequence of cost and the length of the customer journey, how many your organization sells per year
In calculating these numbers, you will also want to account for the sales mix variance – how big a proportion of total actual sales and total sales volume is each type of product? You should also calculate the contribution margins, which is how much additional revenue you make above your breakeven point, where the amount of money you put into making products for sale is equaled by the income you made in selling them.
If you want to become truly great at sales, and you want to get your team to that finish line as well, these are critical metrics to understand.
Sales Metrics are Essential for Sales Growth
The top sales teams recognize there is both an art and a science to selling. On the art arm, we have how personable individual salespeople are, how well the brand narrative reaches existing and potential customers, and how effective your sales scripts are.
On the science arm, we have factors like:
- How effective your customer resource management system (CRM) is at tracking leads and customers
- Which metrics you use to track your sales
- Whether sales volume variance and other metrics are already woven into your current sales pipeline and tracking systems
- How pervasive these metrics are at your organization, and whether everyone knows how to use them
Bottom line: Sales analytics are, plain and simple, key to growing and maintaining your pipeline – and that means you need a system to create, implement, and track the right analytics.
If you want an all-in-one solution for sales teams, try Close. Not only is it straight up an awesome tool, we offer a free 14-day trial with no card required.
We've helped tons of SMB companies grow their sales efforts, and we’re ready to help you do the same thing! Check out our demo to learn more.
