Shelf Velocity
This article covers meaning, importance, factors & example of Shelf Velocity from marketing perspective.
What is Shelf Velocity?
Shelf velocity is the number of weeks or days a product stays at the warehouse as inventory and/or the number of days or hours the product stays at the shelf of a store before being sold to the consumer. Shelf velocity is an important measure of sales as it tells how well a product sells when it is made available to the consumer. Shelf velocity in marketing terms describes the speed at which any product moves from the producer's inventory to the distributor's inventory. In other terms, it means the speed at which a product advances from a retailer's shelf to the consumer's.
Also called as sales velocity, it defines the time in terms of hours or days a product remains at the warehouse or shelf of a store before it is sold to the customer. It measures how fast a product is sold and is made available to the customer. Shelf velocity helps to determine the sales forecast and to compare the performance of the store with its competitors. Faster shelf velocity is more desirable. A higher velocity entails that the firm is making money faster. Sales hence can be said to have two major components – distribution and velocity i.e. how widely available your product is (distribution) and how well it sells once it is made available (shelf velocity).
Importance of Shelf Velocity
Analyzing sales velocity help improve the conversion rate. Analyzing the pipeline or sales cycle for leaks and correcting them can help to hone lead qualification process and to refine the marketing. Improving sales velocity requires balancing between high value and low-value opportunities and allows to manage time effectively. A proper investigation of velocity help in proper balance and improve deal value through a combination of tiered offerings, strategic discounts and cross-selling, etc.
Shelf Velocity help move the resources through the pipeline, arrange more high-value deals and convert prospects to customers and optimize the sales process from start t finish.
Measuring Shelf Velocity
The three ways to measure shelf velocity are:
1. Sales per Point of Distribution (SPPD)
2. Sales per Million (Sales per $MM ACV)
3. Sales per Store
1. Sales per Point of Distribution: Also known as Sales per Point, this is a measure of shelf velocity that can be used to compare products within a market but should not be used to compare shelf velocity across markets. It is also the simplest form and can also be used to compare shelf velocity of different products within the same retail store. It is better than using Sales per Store method as it takes in account the differences in the store size, by using the All-Commodity Volume (ACV) weighted distribution method.
SPPD can be expressed in dollars or units, or volume per point of distribution.
SPDD = Sales/% ACV Distribution
2. Sales per Million: Stands for Sales per Million Dollars of market ACVT and is the best method to compare shelf velocity across markets. SPDD doesn’t work across markets for the obvious reason that a same size point of sale will give more sales in a bigger, more active market than a smaller market. Also, across markets, the ACV value varies too (and not only the percentage ACV).
SPM = [Sales]/[ (% ACV Distribution)x(Market ACV/1000000)]
In simpler terms, SPM means that for every million dollars ($1,000,000) of market sales, ‘X’ amount of the given product are sold. SPM can be expressed in dollars or units, or volume.
3. Sales per Store: This is a measure of shelf velocity that can be used to compare shelf velocity of products within a retail store or of a product across stores. Sales per Store should be compared only for a given market and not across markets.
Working Formula of Shelf velocity
Velocity = Sales / Distribution
or,
Velocity = Sales / Annual Industry Volume (AIV)
where,
Annual Industry Volume (AIV) is the weighted distribution. Low volume stores have less value while high volume stores have more value.
Velocity = (Number of Opportunities * Average Deal Size * Conversion Rate) / (Pipeline length)
where,
Number of Opportunities defines the number of leads the team can work through in a given period.
Average Deal Size is the currency value (for example dollar or rupee value) of an average sale.
Win Rate (or Conversion Rate) is the percentage of leads which become paying customers.
Pipeline Length (or Sales Cycle Length) is the time (days or hours) taken for prospects to move through the pipeline. It depends on the sales cycle, the product complexity and the cost of the product.
Factors Affecting Shelf Velocity
The factors which affect sales velocity are:
1. Number of Opportunities
2. Average deal size
3. Win rate on Conversion rate
4. Pipeline length or Sales Cycle length
Shelf velocity can be influenced by a number of factors like price, promotion, variety available, competitive environment etc. The company needs to make sure that the marketing efforts designed for a particular brand takes care of the above mentioned elements to achieve the optimal shelf velocity.
Examples of Shelf Velocity
1. An electronics manufacturer who makes kitchen appliances wants to know about the sales of its new toaster. Given the information in the table, what is the velocity of the toaster?
|
|
Store A |
Store B |
Store C |
Store D |
Total |
|
AIV (in million $) |
550 |
200 |
300 |
50 |
1100 |
|
Manufacturer's product sales |
400 |
|
1000 |
|
1400 |
Total dollar value of sales= 1400$
Total AIV = $1100
Velocity = Sales / AIV
Velocity = 1400/1100 = $1.3
The toaster sells $1.3 per million dollars of annual industry sales.
2. A business has an average win rate of 30%, has 50 opportunities and an average deal size of $20,000. A sales cycle usually lasts 30 days. What is the velocity?
Velocity = (Number of Opportunities * Average Deal Size * Conversion Rate) / (Pipeline length)
Velocity = (0.3 * 50 * $20,000) / 30 = $10,000
It means the business roughly earns $10,000 each day.
3. For example, suppose the total sales (of the product) is worth $717,288 and the ACV Distribution percentage is 69%, then the shelf velocity can be calculated as follows:
Shelf Velocity = Sales / Dist. = 717288/ 69 = $10,395.5
Hence, this concludes the definition of Shelf Velocity along with its overview.
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