Sales variance definition
/What is a Sales Variance?
A sales variance is the monetary difference between actual and budgeted sales. It is used to analyze changes in sales levels over time. A favorable sales variance arises when the actual sales generated are higher than expected, while a negative variance occurs when actual sales are lower than expectations.
Reasons for a Sales Variance
There are two general reasons why a sales variance can occur, which are:
The price point at which goods or services sell is different from the expected price point. For example, an increased level of competition forces a company to reduce its prices. This is known as the selling price variance.
The number of units sold varies from the expected amount. For example, a company begins selling in a new region, and expects to sell 100,000 in its first year, but only sells 80,000 units. This is known as the sales volume variance.
These two reasons for a sales variance can interrelate. For example, management may decide to keep the budgeted price point throughout the measurement period, despite the price being clearly higher than that of a competing product. The result is no sales variance due to price, but a large negative variance due to the number of units sold being far lower than expected.
A sales variance can be caused by corporate strategy. For example, management may decide to keep prices low in order to deter potential competitors from entering the market. If so, and the budget does not reflect this strategy, there could be a large sales variance.
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How to Improve a Sales Variance
Management typically pays considerable attention to the preceding components of the sales variance, in order to see if prices, product features, or marketing must be adjusted to optimize total sales and profits. Here are several actions that can be taken:
Issue a limited-time coupon offer that is effectively a price cut; this approach will reduce short-term profits on a per-unit basis, but should increase the number of units sold.
Cut back on the number of product features and sell the product at a lower price point; this approach can boost volume while still retaining profitability.
Reposition advertising to show a product as high-end, which may allow for a price boost.