Next in our series of consumer packaged goods data fundamentals is Velocity! If you have not already read our post on distribution metrics. We recommend you give that a quick read before reading this one!
Commonly referred to as sales rate, velocity describes the speed at which your product sells when it is available. In short, it shows you how effectively your product actually sells. Retailers and investors are hyper-focused on velocity metrics when analyzing whether to invest in a product with shelf-space or investment capital because velocity is the number one indicator of whether that product will drive sales if given more distribution.
The ideal market conditions for any CPG is high distribution and velocity, which in turn yields very high sales.
How to Measure Velocity
There are a few ways velocity can be measured, all of which are a type of sales per point of distribution. This is exactly what it sounds like, it is the rate of dollar or unit sales by a distribution metric e.g. a Store. The calculation is as follows:
Velocity = Sales ÷ Distribution
This calculation can be spread across multiple sales or distribution metrics. The most common velocity metrics include the following:
Sales per store per week ($/S/W or U/S/W)
Sales per ACV ($/ACV or U/ACV),
Sales per TDP ($/TDP or U/TDP)
Sales per million dollars of market ACV ($/MM ACV or U/MM ACV).
Putting it into Practice
For every velocity metric, there is a dollar and unit sales equivalent. Preference for unit or dollar velocity metrics varies by company, but we typically recommend to use dollar velocities because retailers think in dollars not units; they are concerned about their bottom line after all! Focusing your selling story on dollar velocity metrics allows for a more tangible selling story when trying to get listed, the retailer will understand how your strong velocity items will grow their category sales if they replace existing items with lower dollar velocities.
The Easier Ones
When starting out, it is suggested to use either U/S/W or $/S/W seeing they are the simplest to understand and highly accessible. These measures are best suited to growing brands that have less products than competitors because they can be collected internally and from retailers and do not require a syndicated data subscription. Unfortunately, these measures do not account for differences in store size, for those we need to use the measures like ACV and TDP.
The More Complex Ones
$/ACV and $TDP begin being used when a brand is accelerating in growth. would be used as a brand accelerates in growth. The reason is pretty simple. Once you are able to look at distribution beyond purely stores selling and are taking into account the individual productivity of a store you will want to be able to apply ACV. Once you also want to account for the Average Number of Items available it make sense to think in terms of TDP. Our post on distribution metrics gets more into the weeds on this.
Comparing Across Accounts
$/MM ACV is a “mega” measure because it is used when comparing across markets such as cities and states or between distribution channels. Simply put, it tells you how much of your product is sold for every million dollars in market sales. We use this measure when looking across geographies, but never when comparing products within a single geographic area or retailer in which case it is always recommended to use a Stores Selling ($/S/W), ACV ($/ACV) or TDP ($/TDP)-based velocity metric.
Unfortunately, there’s no magical equation that will give you an end-all velocity metric. However, although it may not be necessary to work with all the aforementioned measures at the same time, there is significant benefit to understanding all of them, as each has its appropriate time and place. Using a tool that allows you to compare different velocity metrics quickly can be critical to telling a strong selling story- as different velocity metrics may be more favorable to your brand in certain situations.
Because companies internally tend to gravitate around one or two measures, your understanding of all velocity metrics will give you an advantage, seeing you will know exactly which measures need to be applied at each stage of your company’s development. At Red Fox Analytics we specialize in using highly effective, quantitative tools and work with you closely to help guide your conversations; thus, ensuring trust is built with your customers. We’d love to chat.