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This is the last part in our Master Class series and we hope you have had interesting insights following this series so far. We began the series by investigating price analytics and price elasticity, then looked at revenue optimization and choosing the right KPIs. In this series we will go a step further and explore brand vs market impact.
Some brands already steer on the right KPIs, but still might have issues with one of the most important questions: how much of the revenue change was due to market changes and how much was due to my own efforts? In other words; brand vs market impact.
Splitting impact between brand and market
Most companies will analyse their performance by comparing it to last year or previous period.
‘We have gained 100k in revenue’ or ‘we have gained 3% market share’. On the surface this might seem fine, until they lose revenue and people try to pin-point how much is due to their own performance; ‘We have lost 50k in revenue, but we have only lost 1% market share. The market went down so we did ok’.
This vague explanation does not quantify which part of the lost revenue is due to market changes, and which to brand performance. And it is quite shocking how many companies will just accept that explanation and move on.
Being able to quantify market and brand effects is crucial in understanding what revenue can be gained back with different actions.
How is this brand performing? It seems to be following the market.
However, the brand is outperforming the market growth if you
would do the calculations based on brand and market growth.
Indeed, most companies have yearly targets that their relative performance should increase over time compared to competition (market share increases) or at least the same performance as the market (market share stability). Or in other words: if the market grows in revenue, they should grow in revenue with it.
The concept
So how do you disentangle market and brand effects? In the previous paragraph I hinted at the solution by highlighting the way companies act with target setting; brands should keep their relative performance with market changes. Thus, if the market grows by 10%, the brand should also be able to grow by 10% and keep its relative position. This would imply that the revenue a brand would gain (or loose) from keeping the same relative market position, is a market effect.
Any change beyond that is due to brand performance.
Let’s look at an example:
The market is 100k, you have a revenue of 25k and thus a 25% market share.
If the market declines by 40k, and your revenue declines by 15k, how much of that 15k is attributable to market impact, and how much by brand impact? The market declines by 40%. If the brand would keep their relative performance, that would also mean a 40% decline of your brand revenue; a decline of 10k (40% of 25k) is attributable to market changes.
However, the brand declined by more than that for a total of 15k. The remaining 5k revenue change (which causes a decline in market share) is attributable to brand performance.
If you were to attribute the 15k revenue change to market and brand effects, 67% is due to market changes, and 33% is due to additional brand performance.
Why is it so important to show the exact brand impact change?
This harkens back to the same statement made before; brands typically believe in maintaining or exceeding their relative market performance (market share).
If a brand underperforms, the reasoning is that they have had this higher market share before and thus should be able to get back to that market performance (market share). It is also easily quantifiable how much this would gain the brand back and can then be weighed against the cost to undertake action.
Examples of causes of brand impact changes:
- Promotions and promotion effectiveness
- Shelf space gained/lost to competitors
- Competitor/Own product price changes
Market impact changes, as defined in this blog, affect each brand equally within that market space, and are typically harder to influence or control as they are driven by technology, consumer and macro level changes.
Examples of market impact changes are:
- Demand for LCD TVs has declined in favor of LED TV’s due to breakthroughs in technology and changes to prices (Tech related)
- The demand for zero-alcohol beer has increased over the last year, in part due to consumers changes to perception of alcohol as well as the social acceptance of 0.0% beer (Consumer Related)
- Impact of the incident at the Suez Canal in 2021 (Macro level)
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Relative brand growth (market share growth) is gained by taking a larger share of the market;
by growing faster than the market and outperforming the market.
In conclusion:
Actionability is very important in revenue optimization and by disentangling market and brand impact you can focus on areas of actions to gain (back) revenue. And it doesn’t end there; by using this methodology you can also more effectively forecast due to splitting prognosis on market movements and your brand efforts.
Think about your actionability and attribution of revenue. Are you actively including market and brand impact in your analyses and targets?
I hope this series has proven useful to you and you have gained insights in how to approach Revenue Optimization. Feel free to reach out to me on this topic for a more in-depth discussion, or to hear what we can do for you.
