Why Revenue Growth Alone Can Be Misleading
Learn how to separate price and volume effects so you can make better business decisions.
The sales manager was bragging that the team had done a fantastic job. “Sales are up by 20%!” he said proudly. On the surface, that sounded impressive. But when I looked at the P&L, something didn’t add up. While revenue had indeed grown, the cost of goods sold had jumped even more. By 40%!
Had production become more expensive? I hadn’t heard of any issues with suppliers or raw materials. My suspicion was different: maybe this “great achievement” came at the cost of extremely high discounts. In other words, the team might have optimized for revenue, but at the expense of profitability.
Did Revenue Grow Because of Price or Volume?
This is exactly the moment where finance needs to step in. When revenue goes up but costs explode, the real question is not whether sales grew, but how they grew. Was it because we sold more units, or because prices changed along the way?
The first part is about volume: Did we sell more units? The second part is about price: did we raise prices or offer discounts? Separating these two effects is crucial to understanding the business and making informed decisions.
This is exactly what price-volume analysis does. It doesn’t explain why volume changed or why prices moved, but it shows how much of the revenue change comes from selling more units, and how much comes from charging a different price.
Seeing Price and Volume in Action
Let’s take a simple, everyday example:
Imagine you buy 5 apples for €10 one week. That’s €2 per apple. Next week, you buy 6 apples for €13.20. You’ve spent €3.20 more. How much of that is because you bought more apples, and how much is because the price went up?
If you had bought the same 5 apples at the new price, you would have spent €11 instead of €10. That extra €1 comes from the higher price. That’s the price impact. The remainder of the increase, €2.20, comes from buying more apples. That’s the volume impact.
No formulas are needed to see the logic. Price-volume analysis is intuitive: break the total change into the part caused by price and the part caused by volume. Once you see this, it becomes easier to make decisions.
What makes this analysis so useful is that price and volume do not always move in the same direction. Volume can go up while price goes down, for example due to heavy discounting. In that case, you may sell more units and still create very little value, or even destroy it.
At first glance, higher volume feels like success. Price-volume analysis shows when that success comes at a cost.
Turning Insights into Action
Price-volume analysis is not just about understanding the past. It helps you decide what to do next.
If revenue growth is mainly driven by higher prices, the question becomes whether this pricing power is sustainable or whether earlier discounts were unnecessary.
If growth comes primarily from higher volume, the picture looks different. It may be the result of promotions, aggressive discounting, or sales incentives that reward volume over margin.
In that case, the implications go beyond pricing. Rising volume affects capacity and inventory planning, while discount-driven growth may call for changes in promotion strategy or sales incentives.
What looks like success on the revenue line can require very different actions depending on whether price or volume is driving the result.
Seeing the Full Picture
Back to the sales manager: when we broke revenue into price and volume, the story became obvious. Growth looked impressive on the surface, but it was fueled by lower prices and higher discounts. Without separating those two levers, that would have been easy to miss.
Revenue is a result. Price and volume are levers. If you don’t separate them, you are guessing.
Maybe we need to change the job description from ‘sales manager’ to ‘margin manager’?