In the competitive world of consumer packaged goods (CPG), brands are constantly looking for ways to accelerate their growth. But what exactly drives dollar growth in a brand? The answer lies in three key levers: pricing, distribution, and velocity. By understanding how these factors interact and influence one another, brands can make informed decisions to maximize their growth potential.
At the core of growth, dollar sales are influenced by how well a brand manages its Average Retail Price (ARP), how quickly products are sold (referred to as velocity), and how widely the product is available in the marketplace through distribution. Let’s explore how these levers work, how they are interrelated, and the best strategies to push them upward.
- Average Retail Price (ARP): Leveraging Pricing to Drive Growth
Pricing is often the most immediate lever that brands think about when aiming for growth. The Average Retail Price (ARP) represents the average price at which a product is sold across different retailers and channels. This is a critical factor because it directly affects the dollar sales of a product. If you increase the price of your product, and your sales volume remains steady, your revenue will rise.
However, pricing is not a one-size-fits-all approach. Strategic pricing is about finding the balance between what consumers are willing to pay and what the market can bear. Price hikes can be effective in driving growth, but they can also have negative effects if not carefully managed. If prices rise too quickly or too high, consumers might opt for a competitor’s product, especially in competitive categories where price sensitivity is a key factor. Positioning plays a factor as well – customers tend to pay more for natural and specialty product versus conventional products.
Brands must also consider price elasticity, which refers to how sensitive consumer demand is to changes in price. For some “substitutable” products like snacks or ice cream, a small price increase might result in a large drop in sales, while for “must-have” products like bread, diapers and cold medicine, it may not significantly affect consumer behavior. Understanding your product’s position in the market and the willingness of your target audience to accept higher prices can unlock profitable growth opportunities.
- Velocity: The Speed at Which Products Move Off the Shelves
The second lever of growth is velocity, which refers to how quickly a product is sold within a certain time frame, such as sales per store per week. The faster your products move off the shelves, the more revenue you can generate in a shorter amount of time. High velocity is often a strong indicator of healthy consumer demand and brand loyalty.
Velocity is influenced by several factors, including consumer demand, promotion strategies, brand or product positioning, and the perceived value of your product. Products that have higher velocity tend to be those that resonate most with consumers, whether due to quality, convenience, or strong positioning.
To increase velocity, brands can invest in effective marketing campaigns, seasonal promotions, and other marketing strategies to increase consumer awareness and engagement. Moreover, making sure that your products are in stock and available in key locations is essential to sustaining high velocity. After all, if a customer can’t find it, they won’t buy it!
- Distribution: Expanding Your Reach to Drive Sales
Distribution is the third lever of growth, and it plays a pivotal role in ensuring that your products are available to the widest possible audience. Distribution refers to the number of retailers or locations carrying your product, as well as the breadth of channels (e.g., grocery stores, e-commerce platforms, convenience stores) where consumers can purchase it.
Increasing distribution is a key strategy for driving growth because more shelf space and more access points mean more opportunities for consumers to buy your product. However, it’s not just about expanding distribution for the sake of it; it’s about being strategic with where your products are available. Expanding into the right retail partners or geographies that align with your target audience can help maximize sales without overextending your brand.
One common approach to expanding distribution is channel diversification. By making your product available in both conventional, natural and online stores, you increase the chances of reaching a larger customer base. In addition, regional expansion can help brands reach untapped markets, particularly in areas with growing consumer demand. Some regions may respond better than others to your products, so it is wise to do a Category Development Index and a Brand Development Index study to find the best region to launch into.
At the end of the day, it’s important to consider that expanding distribution without maintaining quality or inventory can strain resources. Ensuring that you have the logistics and supply chain in place to support broader distribution is essential for sustaining growth.
How the Three Levers Interact: A Holistic Approach to Growth
While each of these levers — ARP, velocity, and distribution — can drive growth independently, they are most effective when considered together. For example, if you increase the ARP of your product but don’t also manage velocity, you may see a dip in units sold, which can ultimately undermine your dollar sales. Similarly, expanding distribution without increasing velocity or adjusting pricing might lead to stock-outs, damaging consumer perception and overall sales.
Another major linkage between these levers is the inverse relationship between Velocity and Distribution. When a brand is small and only sold in a few stores, the brand’s velocity numbers may look very good – but this is due to the small sample size. Generally speaking, the first stores a brand launches in will be the most productive stores for a long time. When a brand increases its distribution to another retailer, the brand’s overall velocity goes down.
For example – imagine you are the CEO of a drink brand in New York City. You sell your drinks in 10 stores. Everybody loves your drinks, the store managers know you, the store employees tell customers that your drink is the best. Your mom shops at these stores and when the shelf is empty, she texts you about it and harangues the store manager to get more on the shelf (yes, this happens.) Eventually you get an offer from a store chain in California to carry your drinks at another 10 stores. Congrats! You doubled your distribution footprint from 10 to 20. But this comes at a price – no one knows about your drink in these new stores. The hometown brands sell more than you do. Your drinks don’t move nearly as quickly as the ones in NYC. Viewed as a whole, your distribution when up (good) but the higher velocities of the NYC stores were offset by the lower performance of the California stores, making the brand’s velocity go down. Any time a brand expands its reach either via stores or new products, this can happen (and honestly, most of the time it’s OK.)
The most successful brands are those that optimize all three levers simultaneously. For instance, if you’re introducing a price increase, it’s a good idea to ensure that velocity remains strong by supporting it with targeted marketing or promotions. Likewise, expanding distribution can be more effective if your pricing and velocity strategies are aligned to ensure your product moves quickly and doesn’t saturate shelves.
In Conclusion: Driving Growth with the Right Strategies
Understanding the levers of growth — pricing, distribution, and velocity — is essential for brands looking to drive dollar sales in today’s competitive marketplace. By leveraging these three factors effectively, brands can maximize their growth potential and create long-term success. At SPINS, we empower CPG brands with the data and insights needed to fine-tune each of these levers, helping you make informed decisions that drive meaningful results.
In the end, the key to sustained growth is not just managing each lever in isolation but understanding how they interact and create compounding effects. By optimizing ARP, accelerating velocity, and expanding distribution, your brand can reach new heights in both revenue and market presence.