In the fast-paced world of consumer packaged goods (CPG), understanding what drives the growth or decline of a brand or category is essential for informed decision-making. At SPINS, we’ve developed a powerful analytical tool that we call the “decomposition tree.” This five-part set of metrics helps break down the key factors that influence sales, allowing brands and retailers to quickly assess whether their category is growing or shrinking, and what is driving those changes.
A decomposition tree is a visual representation that breaks down complex sales data into its core components. By examining each branch of the tree, you can pinpoint specific areas that are contributing to or detracting from growth. Whether you’re a brand manager, retailer, or market analyst, understanding how to read this tree is an essential shortcut to deeper insights and smarter decision-making.
- Dollars: The Top-Level Measure of Success
The dollar figure is the starting point for any decomposition analysis. It represents the overall sales revenue of a category or brand, and is often the most immediately recognizable measure of success. After all – if it doesn’t make dollars, it doesn’t make sense! At the top of the decomposition tree, you’ll see whether your category or brand is experiencing growth or contraction in terms of total sales revenue.
Dollars are influenced by two major components: units sold and the price of those units. A significant increase in dollar sales could be the result of more units being sold, a higher price point, or a combination of both. The decomposition tree helps drill down to these lower factors, allowing you to see exactly where changes are coming from.
- Units: Understanding Volume Growth
The number of units sold is the second key branch of the decomposition tree. Units represent the actual quantity of product sold. A spike in unit sales reflect strong growth in consumer demand and vice versa.
By isolating units sold, you gain insight into whether your product is seeing real volume growth. If unit sales are increasing, it often indicates that consumer demand is rising, which is a strong signal of healthy brand performance. Conversely, a decline in units sold—even with steady dollar figures—could suggest that consumers are purchasing less frequently or that competitors are taking market share.
- Average Retail Price (ARP): The Price-Volume Relationship
Average Retail Price (ARP) is a crucial metric for understanding how pricing affects your sales growth. ARP is calculated by dividing total dollar sales by the number of units sold. This measure helps you assess whether changes in dollar sales are driven by changes in price, rather than actual volume growth.
For example, if you see a rise in dollar sales but no corresponding increase in units sold, it’s likely that the increase in ARP is contributing to this growth. Conversely, if ARP is decreasing, it could indicate pricing pressures or a shift in consumer preferences toward lower-priced products. The ARP component of the decomposition tree offers clarity on whether pricing strategies are helping or hindering your category’s growth. Often, when ARP goes up, velocity tends do go down (but not always – see Price Elasticity for more info.)
- Velocity: How Quickly Are Products Moving?
Velocity refers to the rate at which products are sold within a given time frame. This metric gives you insight into how quickly your products are flying off the shelves and is often expressed as units/TDP. While velocity can be measured in both dollars and units, unit velocity is used in the decomposition tree because it ladders up to units. A higher velocity indicates that consumers are purchasing your product more frequently, while a lower velocity suggests that it may be sitting on the shelf longer before it’s sold.
In the decomposition tree, velocity plays a crucial role in understanding whether the pace of sales is aligned with your growth objectives. An increase in velocity, coupled with higher unit sales, is a positive sign that demand is growing. On the other hand, declining velocity could signal stagnation or that your product is losing appeal. Usually, there is an inverse relationship between velocity and distribution – when one goes up, the other tends to go down. Learn more about this in our Levers of Growth post.
- Distribution: Where Are Your Products Available?
The final branch of the decomposition tree focuses on distribution. This metric looks at how widely your product is available across different retail outlets or regions. A brand or category’s distribution is a key driver of sales; the more locations that carry a product, the more opportunities there are for consumers to purchase it. In the decomposition tree, distribution is measured in TDP.
Distribution impacts both units and velocity. If distribution is expanding, it may explain an increase in unit sales and velocity. Conversely, a loss of distribution (e.g., fewer retail partners or regions) can lead to a decline in sales. The decomposition tree helps you understand how changes in distribution are affecting your brand’s performance, allowing you to optimize your retail partnerships, voids, and shelf space strategies.
Putting It All Together
The beauty of the decomposition tree lies in how these five metrics work together to quickly provide a comprehensive view of what’s driving growth or causing a decline in your category. By analyzing dollars, units, ARP, velocity, and distribution, you can quickly identify the root causes of changes in performance and make more targeted decisions.
For example, if a category is seeing increased dollar sales, but units are flat, the increase could be attributed to a higher ARP. If a brand’s velocity is stagnant or even slightly increasing while distribution is shrinking, it might indicate that consumer interest is waning, or your product isn’t available where it’s needed. Once the key factor is identified, you can drill down further to find root causes at specific stores or retailers and then work to address them.
At SPINS, we view the decomposition tree as an essential tool for brands looking to understand the dynamics of their category and optimize their strategies for growth. By learning to read and interpret this data, you gain a powerful shortcut to smarter, data-driven decisions.
In the world of CPG, where every decision counts, mastering the decomposition tree is the key to unlocking your brand’s next phase of growth.