In Fast Moving Consumer Goods (FMCG) there is a very familiar progression from a “sell at all costs” philosophy to a point at which distribution and velocity growth has leveled-off and strategy changes. At this point, trade spending very frequently has become a value equal to 25% of gross revenue. There is a shift to prioritizing profitability. Brands turn to a Return on Investment (ROI) metric to decide how to optimize this massive expense. And if you want to calculate ROI, you need base volume. “Return” is the incremental profit created by the promotion. To calculate incrementality, you need a “base” metric.
It is important to note that there are different definitions of and dimensions to “Base Volume.” In one case – often driven by a Demand Planning perspective- “base” is defined as the total sales in some prior period. In this context, planning is capturing assumptions- positive or negative changes- that will cause the present period volume to be different than the “base” period. Another definition – the one relevant to this article- base volume is sales when promotions are not present.
The other important factor to consider is the type of volume being measured- shipments or retail sales. For the purpose of analyzing sales and optimizing trade spending by assessing promotion ROI, retail sales has more benefits and should be the sales data used for base volume whenever possible.
- Upside: You own this data and have SKU/day level data granularity.
- Downside: Less desirable because customer buying patterns may result in (relatively) long periods during which there are no shipments. Does not cover indirect customers (retailers that purchase from distributors) with whom you promote
- Upside: Measures how shoppers react to your promotional offers at the retail-level (both direct and indirect customers).
- Downside: Must be acquired either from the customer or a syndicated data provider. Some forms require data transformation.
Using Base Volume
Assuming use of the “sales without promotion” definition and retail sales as the type of sales being measured, there are a couple of ways to think about using base volume.
Unpromoted Sales Trend Across Time
Given a choice, a brand would prefer growth of unpromoted sales over time, i.e. purchases that are not subsidized with trade spending. Insight into this is enabled by reporting that details base and incremental sales across time. With typical drilldown capabilities available today, this kind of report enables you to a) look at the trend of unpromoted sales over time b) see what customers/products are over or under performing. With this topline insight, you can then dive deeper into the reasons for the trends, and more importantly make adjustments improve your trajectory.
As mentioned earlier, base volume is used in the creation of the promotion ROI metric. When you have a metric for promotion ROI, you can compare results- across products, customers, tactics, seasons, holidays, etc. With this insight you can learn what works and what doesn’t and ideally do more of what works and less of what doesn’t.
Where Does Base Volume Come From?
There are a couple of sources from which a Consumer Goods brand can get a retail sales base volume: your company’s Demand Planning team, a syndicated data vendor like NielsenIQ or Circana (IRI), consultants or TPM vendor like UpClear, or it can be manually created. For the purposes outlined in this article, the best source of base volume is a consultant or TPM vendor that builds a base volume specifically for the purpose of promotion effectiveness analysis (i.e. ROI). From there, using the same data for trend analysis ensures both types of analyses are based on the same foundational data.
- Upside: They may already produce this. It provides a way to generate this forecast without sales team’s involvement.
- Downside: Usually not suitable for analytic purposes. Often, a shipment base volume methodology is applied to a retail sales base volume metric.
Syndicated Data Vendor
- Upside: This is a source you may already have. Base volume is usually a metric in the dataset you purchase.
- Downside: Does not cover all customers. Will require creation of alternative method for these customers. Methodology is not optimized for promotion ROI analysis; e.g. algorithm results in figures that are volatile from week to week, occasionally produces unintuitive results like negative incremental sales.
Consultant or TPM Vendor
- Upside: Produces a base volume purpose-built for promotion analysis. Can produce base for all customers; source for retail sales can be a syndicated data vendor or the retailer (e.g. Retail Link, 84.20). Methodology will be consistent across all customers. Work is not labor intensive for brand.
- Downside: Typically requires extra data mapping and cleansing at creation and maintenance.
Manually Created by Planners
- Upside: Little to no cost option. If centrally managed, can be a consistent methodology across customers.
- Downside: If owned by individual account reps, the output can be manipulated. Results can be misleading. Methodology will not be consistent across customers.
A retail sales-based base volume is arguably one of the most important metrics for analyzing sales in FMCG. Getting a process in place to create and maintain this measurement in a way that is consistent across customers creates a level playing field for comparisons. Then, on this solid foundation you can add analytics that enable you to understand performance and optimize the use of your trade funds.