Product velocity metrics: identifying your real winners

Revenue hides velocity truth

Your top-revenue products might not be your best products. A product generating $50,000 annually sounds impressive until you realize it requires $100,000 in inventory investment and takes six months to sell through. Product velocity metrics reveal how quickly and efficiently products convert inventory investment into profit.

Defining product velocity

Velocity measures speed of sales relative to inventory.

Units per time period:

How many units sell per day, week, or month? Simple but foundational.

Inventory turns:

Annual sales divided by average inventory. A product turning 12 times sells through monthly. A product turning 2 times takes six months.

Days of supply:

Current inventory divided by daily sales rate. How long until you run out at current pace?

Why velocity matters

Fast-moving products have structural advantages.

Cash efficiency:

Fast velocity means cash cycles back quickly. You reinvest the same dollar multiple times per year.

Reduced risk:

Products that sell quickly have less obsolescence risk, less storage cost, and less markdown pressure.

Working capital efficiency:

High-velocity products require less working capital per dollar of revenue. Your cash works harder.

Velocity versus margin analysis

The best products excel at both velocity and margin.

High velocity, high margin:

The ideal. Products that sell fast AND generate good margins. Prioritize and protect these.

High velocity, low margin:

Traffic drivers. They move fast but don’t contribute much profit per unit. Valuable for customer acquisition or basket building.

Low velocity, high margin:

Niche products. They make money when they sell but tie up capital waiting. Manage inventory carefully.

Low velocity, low margin:

Candidates for discontinuation. Slow-selling AND low-margin is the worst combination.

GMROI: the combined metric

Gross Margin Return on Inventory Investment combines velocity and margin.

The calculation:

GMROI = Gross margin dollars / Average inventory cost at cost

Interpretation:

GMROI of 3.0 means you generate $3 of gross margin for every $1 invested in inventory. Higher is better.

Why GMROI reveals truth:

A 60% margin product turning twice annually has GMROI of 1.2. A 30% margin product turning eight times has GMROI of 2.4. The lower-margin product is actually the better inventory investment.

Calculating velocity by product

Build product-level velocity visibility.

Data requirements:

Sales units and revenue by product. Average inventory levels by product. Cost data for margin calculation.

Time period selection:

Calculate over meaningful periods. Monthly data is noisy. Quarterly or annual smooths variation. But don’t ignore recent trends.

Seasonal adjustment:

Seasonal products need context. A winter coat with low summer velocity isn’t necessarily a problem.

Identifying hidden winners

Velocity analysis often reveals surprises.

Underappreciated products:

Products generating modest revenue but turning inventory rapidly. They might deserve more inventory investment and marketing attention.

Consistent performers:

Products with steady velocity month after month. Predictable demand simplifies inventory management.

Efficient profit generators:

Products with best GMROI. These generate the most return per inventory dollar invested.

Identifying hidden losers

Some products look better than they are.

Revenue without velocity:

High-revenue products with slow turns. They generate sales but tie up disproportionate capital.

Margin without movement:

High-margin products that rarely sell. The margin is theoretical if you can’t move inventory.

Inventory sinkholes:

Products where inventory investment far exceeds sales rate. Capital trapped unproductively.

Velocity trends over time

How velocity changes reveals product trajectory.

Accelerating velocity:

Products selling faster over time. Growing demand, successful marketing, or competitive advantage.

Decelerating velocity:

Products slowing down. Market saturation, competitive pressure, or declining interest.

Velocity volatility:

Products with unpredictable velocity are harder to manage. Stable velocity enables better planning.

Using velocity for inventory decisions

Velocity informs how much to stock.

High-velocity stocking:

Fast movers warrant higher inventory levels. Stockout risk is high because they sell quickly.

Low-velocity caution:

Slow movers need conservative stocking. Capital is tied up longer; obsolescence risk is higher.

Velocity-based reorder points:

Set reorder triggers based on velocity. Fast movers need earlier reorder points to prevent stockouts.

Velocity for assortment decisions

Product velocity informs what to carry.

Expansion candidates:

High-velocity products might justify expanded variants—more colors, sizes, or related items.

Discontinuation candidates:

Persistently low-velocity products, especially with low margins, are discontinuation candidates.

Test product evaluation:

New products should achieve minimum velocity thresholds to justify continued stocking.

Velocity for marketing allocation

Where to focus marketing spend.

High-velocity products:

Already selling well. Marketing might accelerate further or might have diminishing returns.

Medium-velocity products:

Potential to accelerate with marketing support. Test whether promotion lifts velocity sustainably.

Low-velocity products:

Marketing might not help if fundamental demand is weak. Don’t throw money at products customers don’t want.

Category velocity comparison

Compare velocity within categories, not across.

Category norms:

Fashion turns faster than furniture. Compare products to their category peers, not your entire catalog.

Category allocation:

Allocate inventory investment to higher-velocity categories. They use capital more efficiently.

Velocity metrics to track

Focus on these product velocity analytics:

Units sold per period by product. Inventory turnover by product. Days of supply by product. GMROI by product and category. Velocity trend over time. Velocity distribution across catalog (how many fast/medium/slow). Revenue concentration in high-velocity products. Margin concentration in high-velocity products. Velocity-adjusted profitability ranking.

Product velocity reveals which products truly perform best when time and capital investment are considered. Use velocity metrics to allocate resources, manage inventory, and build a more efficient product portfolio.