Why comparability matters and choosing the best KPI for Revenue Optimization

Many brands struggle to compare opportunities and express increases in distribution or any other KPI as “what did this do for me?” They assume there is a correlation between these KPIs and revenue (and of course in many cases there is) but fail to express that as a relevant and comparable number.

So far in this Master Class Series, we’ve explored different price analytics and specifically price elasticity in the context of Revenue Optimization. In part 4, we discuss the importance of comparability and choosing the best KPI to use for Revenue Optimization.  

Why comparability matters and why you should focus on a single KPI 

Consider a company that wants to assign a budget to both their marketing and promotional activities. This company would like to know where to best spend its money. The marketing department might have information on their best campaigns and show that they need 2 or 3 campaigns this year; similarly, the department responsible for promotions might have a few ideas on where to effectively spend the budget. And of course, no budget is ever big enough to cover everything. 

So how can you determine where the money should be spent? 

Individual departments likely have KPIs they steer on; the marketing department might track KPIs such as Top of Mind, Awareness, etc. The department responsible for promotions (typically located within sales divisions) may track total units sold, or uplift units (units sold beyond the regular ‘base’ sales). 

Comparing the KPIs between departments and efforts in this case is challenging and often relies on gut feeling. To make sure you are focusing on the right efforts and have a clear understanding of the goal, we need better KPIs that create comparability and are simple enough to work throughout different divisions and layers within an organization.

What are the KPIs you should use? 

The answer to this is both very easy and hard. You need to use the KPI that you report and get accounted on. Most companies (and their shareholders) report and get measured on revenue or market shares.  These are easy to interpret by different layers in an organization and already used in most organizations’ sales and marketing departments for target setting. But isn’t this what companies are already doing? Not quite. 
 
What I am advocating is expressing all efforts in revenue and market share changes, even if they originate from another (steerable) KPI. 

 
By expressing the impact of the change in market shares and revenue, it becomes very clear and tangible for all concerned. 

All those other KPIs that are used throughout organizations, from TDP (Total Distribution Points) to price indices and elasticities are useful for steering, but not to compare efforts or track the ROI of those efforts. 

A common visual for this is a waterfall chart shown below; it indicates a begin and end position (market share or revenue in this case) with the steerable KPIs/efforts in between. The waterfall chart can be used for many different layers; you can start with overall market share and have the steerable KPIs visualized, but you can also focus on one of the KPIs and show the impact of individual efforts on that KPI. 

If we use the example we discussed earlier, we can show the 5% increase in market share from distribution and plot the different retailers as the change columns. Again, the key here is to try and express these in market share/revenue so that even these individual efforts can be compared to individual promotions, etc. 

In the next blog we will take this one final step further; to split revenue impact in both a MARKET and a COMPANY effect. Even if you already do root cause and driver analysis and you already express all efforts in market shares and revenue, do you know how much of that is caused by market trend changes and how much your brand's action impacted your share increase? 

Stay tuned for the final part of the series next month where we show a ground-breaking new way to investigate your performance and truly show how well your actions are impacting your performance!