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What is velocity, and why is it important to focus on this measure? After learning about ACV and %ACV in our CPG Jargon Buster Series, let’s have a look at what velocity is, its relation to sales and distribution, how to calculate it, and what the two major velocity measures are:
WHAT IS VELOCITY?
While distribution tells you how well your product is distributed in the market, or how widely available it is, velocity tells you well it sells once it is on the shelf. Velocity is the measure you want to look at when judging which product is the best-selling or most preferred by consumers, not distribution.
VELOCITY’S RELATION TO SALES AND DISTRIBUTION
When velocity and distribution are combined, one arrives at retail sales. Thus,
Sales = Velocity x Distribution.
CALCULATING VELOCITY
The formula to calculate velocity is derived as:
Velocity = Sales ÷ Distribution.
TAKING CHARGE OF SALES THROUGH VELOCITY
It is generally considered that distribution is in the hands of the distributor, and the manufacturer can always follow up with the distributor for better product availability across geographical areas. However, if the product is not moving off the shelf, meaning that velocity is low, then the manufacturer has greater control over being able to change that.
Let’s understand this through an example, for greater clarity. Suppose 2 products, A and B, are sold equally in a market of 100 stores. Product A has good distribution but low velocity while product B is vice versa.
The table is as follows:
| Market of 100 stores | Sales = | Distribution (x) | Velocity |
| (units) | (stores) | (units/store) | |
| Product A | 6000 | 60 | 100 |
| Product B | 6000 | 100 | 60 |
We see that although distribution for product A is not very impressive, the velocity, or the speed at which the product is selling in these stores, equalizes the sales of Product B, which, although present in all 100 stores, only manages to sell as much as Product A.
In the case of Product B, the manufacturer must have a closer look at his pricing and promotional strategies. Why are people not preferring the product even when it’s available to them in the outlet? Are my competitors outdoing me in those areas, or is their product quality better, or better suited to the audience I am trying to capture? Questions like these need to be raised and answered asap.
Tools like Explorazor and its root-cause analysis function can help a lot here.
TWO MAJOR VELOCITY MEASURES:
The example we described above was one of ‘Sales per Store’. This, however, is not and should not be used in real-world scenarios as store sizes differ, which leads to biases when estimating velocity.
When looking at sales for a single retailer or within a single market, we go with the first velocity measure – Sales Per Point of Distribution, or SPPD.
- SPPD = Sales ÷ %ACV Distribution
SPPD is great for understanding where the root cause of a problem lies – is it in the distribution, or the velocity? Let’s understand this further with an example:
| Mumbai Market | |||
| Distribution | Velocity | ||
| Brand | Sales (in Rupees) | %ACV Distribution | SPPD |
| Product 1 | 65000 | 80 | 812 |
| Product 2 | 95000 | 75 | 1267 |
| Product 3 | 70000 | 15 | 4667 |
| Product 4 | 80000 | 20 | 4000 |
Above is an item level report for an individual market. We see that Products 1 and 2, although impressively distributed, but have poor velocity. The opposite holds true for Products 3 and 4 – %ACV is poor, while velocity is great.
Note that SPPD works only for one market, be it at the retailer level, the channel, market, or the national level. When comparing across markets, SPPD doesn’t work. Also note that a 100% or close to 100% market distribution will mean that velocity and sales will almost be the same, so managers can overlook velocity in favour of focusing on sales only.
- Sales per Million
In a cross-market comparison, certain markets are naturally bigger than others. In other words, the ACV of a Large Market, call it Market L, is bigger than the ACV of a smaller market, Market S.
This is where Sales per million comes in, because it accounts for the ACV of each individual market in the denominator.
Sales per Million is calculated as:
Sales
÷
%ACV distribution X (Market’s ACV ÷ 10,00,000)
Note that ‘Sales ÷ %ACV Distribution’ is nothing but the formula for SPPD. Market ACV, as explained above, has to be taken in the denominator to account for the size difference in ACV.
Regarding the ‘in millions’, Market ACVs are large numbers, and we simply ease our calculations by denoting them in millions.
Let’s compare Mumbai, a bigger market, to Pune, which is 3 times smaller:
Clearly, Pune’s numbers are lesser than Mumbai’s because of the size discrepancy. In comes Sales per Million to level that out.
Example of how we calculated Sales per Million (in the below table) using information from the above table:
For Product 1, Mumbai –
Sales = 65,000
%ACV Distribution = 80
Market ACV Size = 120 million
Sales per Million
= 65000 ÷ [(80/100) x (120 million / 1 million)
= 65000 ÷ [0.80 x (120)]
= 677
Similarly for all.
Notice that Pune’s sales compared to Mumbai
- For Product 1, is almost equal
- For Product 2, not far off
- For Products 3 and 4, is miserably low
Without the Sales per Million calculation, Pune as a whole would have been swept under the rug under the guise of ‘It’s a small city, hence our products don’t do well there’. But conducting the above analysis clearly demonstrates that Products 3 and 4 need a lot of attention if they are to sell in Pune.
Some Notes:
- Sales per Million can be used within 1 market as well, if you want to keep your velocity measures uniform throughout. SPPD is easier to use than Sales per Million, hence people prefer that too
- Velocity is uber-important. Hope we didn’t fail to convey that!
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