The Ultimate Guide to Velocity (Part 1)
What You Need to Know About this Important Consumer Goods Metric
If I could use only one metric to run a CPG, it would be retail velocity.
Velocity is effective at measuring what really matters and it’s incredibly versatile. Not only that, it can tell you things about product quality, supply chain performance, trial effectiveness, and so much more. In many ways, your success starting and running a CPG will greatly depend on your ability to understand and use velocity.
And yet, as I looked around on the internet, I couldn’t find anything that I felt did the metric justice. So, in this 3 part series, I want to share close to everything a CPG founder or team should know.
Today I will cover:
What velocity is
Why you should use it
Ways to use it
How to get your data (including a very scrappy method if you are just starting out or can’t afford to buy data)
What Is Velocity?
Velocity is the rate of sale. It tells how much product is moving off the shelf and at what pace. It measures first and foremost how much people like your product. It is typically represented as units per store per week. But, it can also be shown in a few other ways which I’ll explain later.
Why Use Velocity?
There are three main reasons why velocity is so useful when running a consumer brand:
It keeps you focused on long-term profitability
It reduces noise in the data
It is versatile
Velocity keeps you focused on long-term profitability
If you use sales as your measurement for success you create the wrong kind of incentives for you and your team. Sales makes it easy to get distracted with bad behaviors like chasing distribution and running promotions with only short term gain.
On the other hand, making velocity your yardstick of success aligns your incentives more closely with long-term profit. Velocity measures frequency of purchase and consequently how much consumers love your product. Make no mistake, love for the product is what drives profitable, sustainable growth.
Velocity leaves less to hide and better exposes the health of your business than sales. It's hard to boost velocity by just adding stores. And though you can boost velocity by running promotions, if you measure velocity over time like you should, it incentivizes you to run promotions with long-term benefit (aka promotions that bring in repeat customers). I’ll talk more about time and velocity in part 2 of this series.
Choosing velocity as your guiding metric will help you create the following cycle of profitable growth.
When you chase velocity, you naturally make customer-focused decisions and develop a quality product experience.
Consumers will love your product, buy it over and over again and then tell their friends about it.
The word-of-mouth will reduce your cost of acquisition of new consumers
These new consumers will try and love your product too and the cycle will repeat itself.
Low cost of acquisition + high customer loyalty = profit
The best way to get these is to build a great customer experience.
The best way to incentivize the development of a great customer experience is to maniacally focus on velocity.
Velocity reduces noise in the data
When you track your sales, there is a lot of noise. For example, your sales might be growing month over month but it may be that your store count increased or there was an extra weekend in one month. I’ve spent my fair share of time analyzing sales data and there are a lot of things that can go wrong when performing the analysis.