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!
Indeed, during their visit, the latter are not allowed to talk about price. 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.
In addition, 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.
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!
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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