The effect the product mix has on the growth of a business depends on the desirability of and demand for it, which in turn drives sales volume. Increased margins are normally achieved for products that are at an earlier stage in their life cycle or those that have less competition in the market. The more barriers to entry there are for competitors, the higher the margins of products. Growth is achieved by expanding the customer base to which existing products can be sold or selling new products to existing customers.
The customer mix can be heavily influenced by the change in product mix. New products may grow into different market segments that bring new customers. The customers may differ in the way they pay, the length of the sales cycle and their demand for other complimentary products.
Stock carry of different products, customer payment terms and the terms available from creditors affect the working capital cycle. Each new product or client affects this cycle: Different products have different sales cycles and storage requirements, some products can be sold for cash, services means no stock carry, certain customers will have different payment terms and certain products can be sourced from suppliers that have longer payment terms. Selecting new products and customers with this in mind contributes to the ability of the business to accelerate its cash flow cycle.
A track record of growth, through consistently optimising the sales mix, installs confidence in management’s ability and creates the expectation of further growth. This confidence translates into a lower business risk and as a result a lower cost of capital at which a business is valued.
The consistent improvement in sales mix has a compounding effect on the business valuation. Sustainable improvement in sales volumes, margins and the cash flow cycle improve cash generated from operations, in the short-term and in the long-term. More confidence in management justifies a lower cost of capital at which these short-term cash flows are discounted and the (long-term) terminal value is calculated. All these lead to a higher business value.
Readers will be surprised by how much consistent (even if marginal) positive changes in the sales mix increase business value. Why don’t you consider improvements that you can make and see the difference? You can try this out for free on Worth.Business.