Interpreting sales trends in the retail sector can be a complex task for your brand. General consumer trends and the information shared with you by your distributors don't always enable you to understand why sales have risen, fallen or stagnated. Worse still, you can't always make the link between changes in your product strategy and pricing, and their impact on sales.
You'll discover how the price effect and the volume effect can help you better understand the evolution of your sales.
Here we go!
Brands have a number of marketing tools at their disposal to boost their sales in supermarkets or maintain their margins in times of inflation. Upstream of promotion and merchandising, the strategy always focuses on assortment, i.e. defining a set of products to maximize revenues by addressing each market segment with a product/price mix.
But you're not the only one working on your positioning and marketing mix: your competitors are too! And then there are the often fluctuating consumer trends. For all these reasons, you are regularly called upon to change your strategy, either by upgrading your product range, or by adjusting your pricing (and often both at the same time).
Result: these changes impact your sales.
But to what extent exactly? Was it volume or price that contributed most to sales growth?
To answer this question, we will review 3 indicators:
And for those who skipped maths lessons at school, don't panic! We're going to accompany the demonstration with a concrete example, so that everything is clear.
This year, your famous yogurt brand has achieved a surprising increase in sales in one particular outlet. As sales manager, you can't stop there: you want to identify the real causes of this development. Especially as this will surely help you to work out your strategy in other sales outlets in the region!
Here are the figures you'll see between 2022 and 2023.
The price effect refers to the impact of changes in the price of a product or service on the final sales it generates.
Here is the calculation formula (for an annual frequency):
Price effect = N-1 volume x (N price - N-1 price).
The indicator reflects a change in relation to the previous year's volume. In this way, it is possible to correlate price changes with sales trends, and understand the extent to which they have impacted sales.
The result is positive if your products sold for more than the previous year.
📕In our example:
Price effect = 8200 x (12 - 10) = €16400.
The volume effect represents the impact of changes in the quantity of products or services sold on the resulting final sales.
Here is the calculation formula (annual frequency):
Volume effect = N-1 price x (N volume - N-1 volume).
As before, the starting point is the previous year's price. The aim is to measure its contribution to sales growth.
The result is positive when the quantities of products sold have increased.
📕 In our example:
Volume effect = 10 x (8350 - 8200) = €1,500.
In practice, price and volume trends often interact. When your prices fall, volumes tend to rise, and the reverse is also true. However, it can also happen that prices and quantities rise or fall simultaneously, with or without correlation.
This is why there is usually a residual rate that can be attributed to both price and volume. This is the cross effect!
Here is the calculation formula (still on an annual basis):
Cross effect = (price N - price N-1) x (volume N - volume N-1).
📕 In our example:
Cross effect = (12 - 10) x (8350 - 8200) = €300.
In our example, we can immediately see that the price effect is much greater than the volume effect.
This means that price trends have had a much greater impact on sales than trends in the number of products sold.
The cross effect represents the residual impact that can be attributed to both price and volume.
A little observation for calculation fans: if you add up the 3 indicators, you get... sales growth!
Sales growth = price effect + volume effect + cross effect = €18,200.
While these calculations are used more by senior management, they can also be used by a wide range of people within the company to understand changes in their respective sales areas: sales managers, national sales managers, regional sales managers and area managers!
Just like panel data and strata in supermarkets, the price-volume effect can be a powerful lever for your area managers when negotiating new commercial conditions. This may include adding a reference to the test range, increasing the number of facings or integrating a product into a new category. Price and volume effects are used to identify and evaluate the various elements that impact a company's sales, but they can also be reduced to a product, a sales outlet or even a brand.
Let's take the example of a kombucha brand, mainly present on the ambient shelf. Its sales manager notes a positive price effect on sales in his Intermarché Express and U Express stores on the Côte d'Azur during the summer season. This means that price increases have contributed to a rise in sales generated by these outlets. In this context, it can be strategic, as summer approaches, to send your area managers to negotiate directly with department heads or store managers to obtain more shelf space, the addition of references to the fresh section and an increase in facing in the ambient section.
It's important to remember that your floor managers can't always talk about price when they visit. Highlighting these effects is a good way of negotiating with the floor manager without talking price. For example, the salesperson can use the volume effect to lower the distributor's prices. This is all the more important in times of inflation.
And, as always in the retail sector, base your calculations on real figures. For example, if you have a retailer's checkout data at your disposal, you'll be able to come up with reliable and, above all, useful results!
It's difficult to discuss price-volume strategies without mentioning promotions, which are one of the most powerful tools for influencing these effects. Properly managed, they can increase volumes, but beware of their impact on overall sales.
Let's take the example of our kombucha brand which, as the end of summer approaches, decides to use a promotion to clear its last stocks. Area managers negotiate a temporary discount with stores to boost sales. Here's the result:
At first sight, sales were down due to a negative price effect (due to lower unit prices).
However, a more detailed analysis shows a positive volume effect thanks to the increase in the number of products sold.
To better understand the overall impact of this promotion, it is necessary to calculate the cross-price-volume effect, which takes into account both the drop in price and the increase in volume:
The calculation here shows that the cross effect is positive, with a gain of €100. This means that, despite a drop in sales due to the price, the increase in volumes sold generated a favorable overall impact. This kind of analysis is crucial in assessing the success of a promotion.
A positive cross-over effect often reveals strategic opportunities that brands can exploit. In this example, it might make sense :
A positive cross effect refers to a situation where a change in one variable (such as product price or volume) has a favorable impact on another variable or on overall results, such as sales. In other words, interactions between different factors (price, volume, product mix or geographic zones) contribute to an overall improvement in sales performance.
In this case, it's a good idea to incorporate these effects into your sales strategy and forecasts:
Once again, it's vital to leverage the data in your sales CRM. Use data from past sales to identify future trends and refine your decisions.
Now you know how to handle the price effect, the volume effect and the cross effect, three indicators that will help you better understand the evolution of your sales. In the ever-changing world of mass retailing, mastering these indicators will give you greater analytical finesse. You can then make the best strategic decisions.
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