Profitability case: should Mix Effect be an individual bucket?

Question

In the initial diagnosis of a profit problem, we usually start from two main buckets: revenue and cost. Some experts advice putting “mix effect” as an additional bucket, while some suggest discussing “mix effect” within the cost bucket (i.e. segments with higher cost relative to revenue has increased). However, the mix effect could also be discussed within “revenue” bucket (i.e. segments with higher revenue relative to cost has reduced).

Could you share your opinion on (1) which approach is better and more logical? (2) If the second approach is suggested, should I discuss the mix effect within the revenue or cost bucket?

Thank you!

Answer 1

Hi there,

First of all, your initial premise “we usually start from two main buckets: revenue and cost” is wrong!

Every profitability case needs to be treated differently. Any combination of market, product, customer, competition, internal, external, revenue, cost, etc. should be considered and used based on the case on hand!

You need to fundamentally rethink how you approach profitability! Then, you'll realize “mix effect” would actually just be incorporated in any new framework you have (perhaps in Product or Competition, depending on the case)

Answer 2

Hi!

I think it really depends on the specific case!

One way to go about it is to state that you also want to dig deeper into mixed effects and then focus on a specific type (i.e. revenue or cost) once you found its relevance in the case.

Hope this helps.

Best,

Anto