Chapter 43
Sales Price Variance
Measurement Need
Understanding actual versus budgeted price helps marketers identify and address the factors (i.e., distributor demands, customer needs, market conditions, competitor actions, etc.) that cause actuals to differ from plan.
Solutioni
The sales price variance formula is:
Where
SPVt = sales price variance in time period t
Uat = actual units sold in time period t
Pat = actual price during time period t
Pr = retail or recommended price
To illustrate, Glob Toys (not real!) sells a product called “SlobberChops,” which is a mechanical dog that drools perpetually after an internal water chamber is filled. The company sold 100,000 units last year at an actual price of $4 each. Suggested retail was $5:
The calculation shows that Glob Toys had a sales price variance (SPV) of $100,000, meaning that actual sales were lower than projected sales by that amount. We look at a more sophisticated treatment: Glob Toys has two products, BlobSlob (a slimy clay that can be molded into monster shapes) and SlobberChops. Glob planned their expected results as follows:
Projected performance
| BlobSlob | SlobberChop | |
| Unit sales (projected) | 100,000 | 50,000 |
| Unit price (recommended) | $5 | $10 |
| Unit cost (projected) | $3 | $6 |
| BlobSlob | SlobberChops | |
| Unit sales (actual) | 120,000 | 60,000 |
| Unit price (actual) | $4 | $8.50 |
| Unit cost (actual) | $3 | $6 |
In this case, costs remain the same because Glob Toys had locked in supplier prices and production costs in advance. We can now compare:
| Projected revenue | (100,000 × $5) + (50,000 × $10) | = $1,000,000 |
| Actual revenue | (120,000 × $4) + (60,000 × $8.50) | = $ 990,000 |
| Projected profit | (100,000 × $2) + (50,000 × $4) | = $ 400,000 |
| Actual profit | (120,000 × $1) + (60,000 × $1.50) | = $ 210,000 |
| Total sales variance | –$ 190,000 | |
The next step is to calculate the SPV:
Therefore, Glob Toys’ SPV shows the effect of price changes from projected to actual, resulting in this case in $210,000 less in total sales versus plan.
Impact
While it is clear that price changes have an impact on actual financial performance versus projected, it is less obvious how to fix it in the future. The marketer could mandate a strict “no discounting” policy, with the chief executive officer and chief financial officer’s blessings, and some consumers would happily pay the full amount, but many more would simply shift to a competitor product or delay purchase to a later time period. This would exacerbate the sales variance problem since there would now be a smaller customer base and lower sales, not to mention a probable negative perception of Glob Toys’ image, particularly from retailers who want to sell the inventory quickly. They may reduce their future purchases of Glob Toys’ products, knowing that the firm is inflexible and insensitive to their needs and the market conditions that created them. Marketers in this situation have several options:
- Hold firm on price and risk reduced overall sales and a smaller customer base.
- Allow pricing deviations to attract more customers, but recognize the lower sales as a result, plus reduced margins. This may increase market share for a short period of time, but it may also lock in a more permanent lower-margin performance.
- Reduce costs to allow for greater pricing flexibility without eroding margins.
- Increase the value-add of the products, perhaps by offering a unique loyalty program or a clear explanation for why their product is superior and why it is relevant to the customer.
None of these are easy choices and a marketer may try each of these in an effort to find the best combination that maximizes sales and profits, and attracts the largest number of customers.
Data for unit price will be found in manufacturing reports and aggregated financial summaries, both quarterly and annually.
iC. Gilligan and R. M. S. Wilson, Strategic Marketing Management: Planning, Implementation & Control (2005), 781.