Account Value Metrics

Posted by Tom LarsenFeb 25, 2015 Marketing, Planning, Sales 2 Comments

Over the years, I have come to deeply respect the simplicity of account value metrics. To be “sharp” at the game of growing a consumer product business, in my opinion, you have to be able to understand the actual value an account can bring to a company. To do that, I have learned (or created, I’m not sure which), the two simplest ways to achieve that awareness.

Fundamentally, adding more accounts and doors is a good thing. It expands the number of consumers who will buy the products – pretty obvious. But, which accounts are worth more than others and are therefore, harder to get into and more valuable when you do (and more protected by the existing brands in the stores)? So here are my formulas.

There are two methods I use: the retailer’s inventory turn rate needed to keep the space or the likely consumer purchasing method used to determine the reorder rates needed to keep up with demand.

You sell one item to a store. It takes 6 of them to fill a hook or a shelf space. Those 6 items x 3 inventory turns per year is 18 sold items per year. If each item is $10 wholesale, then that space at that account is worth $180 per year. You sell a collection of 10 items to the account, each at 6 per hook or a shelf space, which becomes 180 sold items per year. That account is worth $1800 per year.

The alternate way from the demand side is to do the math via purchase rate. Sales of 1 unit every week is 52 unit a year. In the previous example, that is far greater than 3 inventory turns. At $10 per item that it $520 per year per item. Now let’s apply it.

Walgreens has 9000 stores. Band aid 1” strips are in all stores. The wholesale price to Walgreens is $1 and a shelf holds 5 with inventory turns of 10 times a year (this is an illustration not a fact). That little space that the little box sits in is worth $450,000 a year ($1 x 5 x 10 x 9000) to Band Aid. That means to Walgreens, if they are going to replace that Band Aid 1” strip with something else, it is a $1 million decision (they mark it up), for one little space. Is a box a week the right sales rate? What if it is two? You need to know for your product.

It is exactly this math that gets your juices flowing, but, can also make clear why 1 tiny little product in Walgreens (or anywhere else) fails or succeeds. Fail to produce the revenue by actually selling the volume to consumers, and you’re out. Fail to support the effort by bringing consumers to the space, and you’re out. Fail to price the product properly and not deliver the results, and you’re out. Have some other brand come in with a better offer, and you’re out.

Know the math that matters to the buyer and then how you can achieve scalability AND support it. You product at Walgreens could be a wonder product, but, failing to drive traffic and support it may lose the most precious real estate that product may ever attain. That’s exactly why Walgreens is not very inclined to take on an unproven product and why Band Aid has 50 SKUs (or more) in Walgreens. Go with what you can trust. Everything else is risk.

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