Sales velocity pricing is, on the surface, quite simple: it’s a pricing strategy that’s based on how quickly items sell. But as we’ll see, this seemingly simple strategy has a lot of moving parts and quite a few limitations.
This doesn’t mean that sales velocity pricing is always a bad idea, but it does mean that it should be applied with care.
Let’s examine what it is, how it relates to sales and margins, and when it’s best used. To understand the subject thoroughly, we’ll start by defining one of the core concepts: sales velocity.
What Is Sales Velocity?
Roughly speaking, sales velocity is how quickly your business generates revenue from sales. The sales velocity calculation starts with market segments and multiplying the number of opportunities by deal value and win rate. You divide the resulting product by the length of the sales cycle for that segment and you have your sales velocity for that particular piece of the market.
Knowing your sales velocity is a pretty good indicator of the health and effectiveness of your sales process. It’s also a prime factor in velocity pricing.
What Is Velocity Pricing?
As mentioned above, sales velocity pricing is based on how quickly goods are sold; fast-moving goods are priced relatively lower, while slow-moving goods are priced relatively higher.
An example is a clothing manufacturer. Suppose this manufacturer produces two lines: a fast-fashion line that sells a lot of items, and a prestige line that sells fewer items. The fast-fashion line is cheaper and quicker to produce, is priced lower, and sells quickly and often. The prestige line takes more time and expense to produce and sells slower but for more money.
Both lines contribute to revenue, and both are priced (at least partially) based on velocity.
Velocity Pricing Factors
But what are the actual “moving parts” of this approach to pricing?
Many would say that margins are one of the most important parts – that optimized results occur when low-velocity items have higher margins and high-velocity items have lower margins. While this is a generally accepted rule (the idea being that the volume of sales makes up for the lower margins in generating revenue), it’s not the only factor in play.
To get a more accurate pricing strategy, it’s important to weigh more than velocity and margins. As such, pricing strategies also need to consider:
- Basic marketing segment information (geographic region, market size, demographics or firmographics, etc., as we’ve seen in the sales velocity calculation).
- Price variances.
- Order size, frequency, and combinations.
- Demand and demand elasticity.
- Purchase recurrence (i.e. one-time, monthly, yearly, etc.).
With this in mind, let’s talk about who should use velocity pricing and why.
Velocity Pricing: Who And Why?
As a rule, we advise businesses to use sales velocity as a factor in price optimization; however, we don’t advise basing pricing decisions solely on velocity. Even so, there are some instances where velocity-based pricing has been shown to work.
Research suggests that you’re more likely to find velocity-based pricing strategies for products rather than services, for distributors rather than manufacturers, and for firms that offer many types of items rather than a small selection – although there are exceptions to all of these rules.
Why use it? It can be a useful starting point, especially if your product’s price matches its perceived value and you have product velocity where some products are consistently driving high-velocity sales.
However, we wouldn’t recommend using sales velocity pricing on its own or for long periods of time, and especially not without reevaluation and readjustment. As with any pricing strategy, it’s important to continually monitor the effectiveness and identify when it’s time to change tactics.
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Velocity Pricing In Practice
Pricing in practice is often very different from pricing in theory. In theory, setting prices is easy – but in real life, we have to account for all kinds of variables, including market fluctuations, competition, changes in style and customer expectations, advances in technology, and so on. That’s why there are multiple pricing strategies and pricing optimization tools – setting profitable prices is an ongoing process.
Proponents of velocity claim that it boosts profits; critics point out that velocity pricing, in practice, is rarely simple and that it requires a lot of moving parts to work properly. They also point out that sales velocity in itself is an important part of determining a price strategy, but it is far from the only factor involved.
Interestingly, it isn’t often considered a core pricing strategy. Much like dynamic pricing, penetration pricing, volume pricing, et cetera, velocity pricing has a time and place where it can boost profit. And like the strategies just mentioned, it’s not an approach that suits every type of business. The key to leveraging a successful sales velocity pricing strategy is knowing when and how to use it.