COMPONENTS OF VOLUME (CoV)
What is the formula for growing sales?
In the most simplified mathematical terms, the formula looks like this:
(Number of people buying your product) * (How often they buy your brand) * (How much they spend per transaction)
In shorthand: total sales = penetration * frequency * transaction size
(even shorter: $ = P*F*T)
This is commonly referred to as the Components of Volume.
It represents the three fundamental levers you can pull to increase sales. And understanding it gives you some idea of which lever can have the biggest impact.
There are only three ways you grow sales:
- Get more people to buy your product
- Get current buyers to buy more often
- Get current buyers to spend more on each purchase
New buyers are always 100% incremental to your existing sales. If your product has been bought by 4% of shoppers, increasing that by one percentage point (to 5%) could actually increase your overall business by 25% (all other things being equal).
Higher purchase frequency can be accomplished through a pull strategy (getting buyers to consume your product at a faster rate which requires more frequent repurchase) or push strategies (creating promotional plans that incentive and accelerate unplanned repurchase).
Transaction size can be increased through the dullest tool of all: Price increases. But it can also be accomplished through distributing larger sizes or multi-packs.
THE ROCK-PAPER-SCISSORS OF SALES
As is typically the case, there is danger in using over-simplified models to describe complex systems. While using the components of volume equation is a great starting point, consider some of the many false assumptions you can make and the many ways the components are interconnected:
- New category buyers don’t always act the same as existing buyers: New buyers may be more sensitive to price and may consume the category at a much slower rate.
- As price increases, penetration typically decreases. And it can do so at an accelerated rate (i.e. a 5% increase in prices scares away 10% of shoppers).
- Efforts to increase transaction size can backfire by reducing purchase frequency as buyers slow their consumption or shift sales to lower priced competitors that appear to be a better value.
- Higher purchase frequency is only sustainable at higher consumption rates. You can’t get people just to buy more often…you need to get them to use more often.
- Beware that money spent on marketing could attract new buyers to the category only to have them buy your competitor's product.
Sometimes penetration beats transaction size. Sometimes frequency beats penetration. What's the pecking order for your product? The answer is it depends.
SPEND TIME FINE TUNING YOUR FORMULA
To use an example, consider the extreme ways you can make your first million dollars in sales:
- Go for high penetration: Plan to get a million people to buy your product once at $1.00 each.
- Go for high frequency: Plan to get 100,000 people to buy your product 10 times at $1.00 each time.
- Go for high transaction size: Plan to get 250,000 people to buy your product at $4.00 each (or maybe 100,000 to buy your product at $10.00).
- Go for the Hail Mary: Could you convince 10,000 people to each pay $100 for your product?
These examples are arbitrary extremes, but represent a glimpse of all the paths you could take in pursuit of your first $1,000,000 in sales. And it takes deeper digging to know which path is right for a particular product.
But you are smarter than most, so you’re already thinking about which represents the path of least resistance. You want to pick a plan that has the highest probability of success. You want to find the point that maximizes sustainable sales and sustainable profit.
So what path have you chosen? What information helped you arrive at your decision? Did you do a top-down supply-side approach based primarily on what numbers make your business model look best? Or did you do a bottom-up demand-side approach that sought to understand what best fits with your prospect?
Remember that more accurate projections are far more valuable than inflated expectations that are never realized. Accurate sales projections are the necessary foundation to know what funds will be available to operate your business. After all, lower than expected sales quickly cascade into cutting funding for marketing plans and merchandising programs that further slow sales…until there are no more sales and no more costs to cut.
Based on my experience, companies are consistently overly optimistic across all three of these components:
- They anticipate far higher penetration than products that have been around a lot longer and have spent a lot more on marketing to create awareness and demand.
- They think people are far more willing to spend more or pay a premium price for their product.
- They assume far higher and more frequent repeat purchasing that ends up taking much longer to materialize, if it materializes at all.
DO THE MATH
Make sure you’re not ignorantly building a house of cards that will collapse before your eyes. Don’t rely on optimistic assumptions based more on what you want to believe than on what is realistic.
Don’t approach this problem by deciding what has to be true to give you the answer you want (“If I assume 10 units per store per week, I can say I’ve got a $50 million proposition).
Determine what is realistic (“I should be able to realistically move 2 units per store per week which would result in a $10 million proposition).
With this, you’ve got a foundation you can build upon. Make funding decisions based on $10 million in sales, and ask the question “how can I invest my resources to start growing this $10 million to the $50 million I want” (hint: it will take more than going into your volume forecast spreadsheet to simply change the 2 units per store per week to 10).
We help companies make more conservative, data-based projections related to the components of volume by modeling shopper preference and behavior. We believe the shopper needs to dictate what variables are put into this formula. Only they can tell us if they would buy your product, what they are willing to pay for it and how often they are likely to repurchase it.