Managing what Matters, Not what is Easy

Originally published on LinkedIn May 7, 2019

A better way to measure and manage growth.

In a previous LinkedIn post, I shared a framework highlighting key drivers that, in combination, can determine the extent to which an emerging brand can achieve profitable growth.

Diagram 1.1: Seven Profitable Growth Drivers for Emerging CPG Brands

As a result of that post, I received a number of questions related to Growth Driver #4, namely Margin Velocity. “What is Margin Velocity? Why not use the standard definition of sales velocity? Which financial margin are you talking about?”

There is nothing wrong with using traditional measures of velocity and distribution within the CPG industry. Included, are velocity measures such as Sales per Point of Distribution (SSPD) or Sales per Million (Sales per $MM ACV) and distribution measures such as % ACV Distribution or Million Dollars of Market ACV ($MM ACV). These measures are, if a brand can afford them, conveniently and regularly available from syndicated store data providers such as Nielsen, IRI and SPINS (for Natural & Organic channels). Many companies also compile their own measures or a mixture of proprietary and purchased data in order bridge data gaps in channels and retailers served.

My preference and strong recommendation is to take velocity measurement one step further and use Margin Velocity. This preference will be further explored and justified over a number of subsequent articles in this series. As an introduction, however, let’s start here.

Margin Velocity, for a given time period, is the Profit Margin (as measured by $ Gross Margin or $ Sales Contribution Margin) per Unit of Distribution (as measured by No. of Stores or % ACV Distribution or Sales per $MM ACV or any other indicator of distribution availability) (ACV = All Commodity Volume)

Maximizing sales velocity is NOT the same as maximizing margin velocity, especially if a brand is to be built for the long-term. Growth strategies and the respective execution tactics to maximize sales velocity versus margin velocity, carry different profitability implications and trade-offs.

Nowadays, achieving and sustaining growth for most brands requires a pragmatic omnichannel presence and roll-out approach. And the more a brand expands in various channels and geographies, the more the brand and its stock-keeping units (SKUs) will be subject to varying competitive and demand dynamics. The increasingly-complex market dynamic often results in or requires a notable variation in the pricing, cost-of-goods sold (COGS) and direct sales & marketing expenses for that brand and its SKUs in the various channels and local markets. Needless to say, the brand and SKU profitability will therefore also vary, raising the hard questions related to expansion and investment priorities and sequencing.

So, if pricing, COGS and direct sales/marketing expenses are different for the same SKU in different channels and geographies – measuring margin velocity will help to highlight the real bottom-line impact of a brand’s growth strategies and execution tactics. Sales velocity alone will not expose this. A brand can also experience a sales velocity increase while simultaneously experiencing a margin velocity decrease.

What we also know is that, whether a brand is considered an incumbent brand or an emerging brand, it is becoming increasingly more difficult to secure and sustain shelf-space placement for existing or new stock-keeping units (SKUs). Not only are brands competing with the unprecedented proliferation of startup innovations in fragmenting categories, but they are also competing with the retailers’ own appetite to significantly grow their own premium private-label offerings.

The endless shelf has come to an end

Securing “shelf-space” is not that different in the digital world. The days of the “endless” shelf of e-commerce are coming to an end. Not because you cannot create an on-line e-commerce relatively in a cost-effective manner, but rather that the lion’s share of e-commerce is converging and gravitating to a few powerful on-line channels and providers. And if you want to place your brand there, and also get the visibility and attention you believe the brand deserves, you need a substantial amount of direct marketing and sales dollars to secure and sustain both physical and mental availability. We are at that stage, where if you want to introduce and scale a new brand, your direct marketing and sales expenses will often exceed your COGS! 

Whether a brand’s “shelf-space” is located in bricks ‘n mortar channels and/or digital channels, it is at these points-of-availability where the demand bottleneck occurs. And, as I will expand on in subsequent articles, it is the demand bottleneck that determines the rate and extent of profitability throughout the entire value chain. Margin Velocity, if measured correctly, measures a brand’s profitability and growth prospects through the lens of a brand’s largest constraint, namely the demand bottleneck at “the shelf”.

Diagram 1.2: Margin Velocity and the Demand Bottleneck

Margin Velocity Accounting (MVA)™

If you really want to manage what really matters, you need to substantially dial-up the way you measure velocity and distribution. Importantly, a brand needs to measure the direct impact of changes in velocity and distribution on the brand’s and company’s financial results. Directional opinions or anecdotal correlations are not that helpful. Brands need credible and direct financial measures, that can make past or proposed actions and decisions visible. Not to allocate blame ­­- but rather to learn, adapt and act!

Margin Velocity Accounting™ allows a brand to achieve this!

Margin Velocity Accounting (MVA)™ is a cost and throughput accounting approach that allows a company to measure the direct financial impact of the changes in a brand’s or SKU’s velocity and distribution reach. 

The approach allows a company to measure the impact for its brands and SKUs at the individual and the aggregate level. In Dollars (or Pounds, Euros, Yuan etc.).

Monitoring margin velocity and distribution, in terms of their financial impact, is more than just tying them back to a company’s financial statement. At the heart of monitoring is improvement and you can only improve if you know where you are and where you need to go. The use of Margin Velocity Accounting™allows you to visually map all your brands and SKU’s on a Margin Growth Grid that not only displays the actual financial impact of changes in velocity and distribution but also the opportunity or risk status of that growth (or decline).

Diagram 1.3: Margin Growth Grid showing the growth status of different SKUs in the targeted market areas

This type of analyses can be done by brand, by SKU, by retailer and/or across market areas. Progress can be plotted in various time-frames. If you have syndicated data and make some smart assumptions, you can include a plot of competitor brands. The analyses approach also allows a brand and company to expose the specific impact and contribution of price, COGS and direct sales/marketing changes. With appropriate artificial intelligence (AI) and machine learning technology linkages, MVA™ can be transformed into a powerful prediction and what-if planning platform! 

Managing what matters

Measuring and managing Margin Velocity at the shelf and over a period of time, empowers a brand and the business to take control of its long-term profitability and sustainability. It is important to note that Margin Velocity Accounting™is not just for emerging brands. Its measurement and management is just as relevant and important for established and mainstream brands.

Subsequent articles within this series will further frame the rationale for using Margin Velocity and Margin Velocity Accounting (MVA)™. The underlying objective of the articles is to contextualize why and how the optimization of Margin Velocity can help to manage overall profitability through a brand’s real value-chain constraint, namely the Demand Bottleneck. For most CPG companies, this constraint is directly related to how Brand Demand and Brand Choice is manifested at the shelf or point-of-availability.

Measuring Margin Velocity, in financial terms, can be used as a tool to monitor and drive the appropriate strategic and execution-level decisions and actions in the persistent quest for profitable and sustainable growth. Used and communicated effectively, Margin Velocity serves as an effective mechanism to collectively hold marketing, sales and supply-chain teams accountable and focused on a common financial and growth goal.

NOTE: The Margin Velocity Accounting (MVA) ™ algorithm and software is a separate platform to Margin Velocity Planner ™. Please contact Manoli if you wish to conduct an MVA analyses for your Emerging CPG Brand.