Understanding Business Sales Volitility
by Doc Rich
All businesses experience volatility in sales. At times sales grow at a rate faster than average and at other times sales grow slower than average, or may even decline. To be successful in the long run, it is essential to understand why sales growth is changing and to learn to properly respond to change as it occurs.
There can be many reasons for business sales volatility. Two of the most common reasons are industry volatility and the product life cycle. A proper response to a change in sales growth requires proper identification of the cause.
Industry volatility is caused by competition within an industry. It represents market share that moves from one company or set of companies to another. Companies that lose market share experience negative volatility in sales while companies that gain market share have positive volatility. The more competitive the market, the more likely that sales volatility will be high.
The best way to compete in a competitive market is to strive for product or service differentiation. In an industry where the product or service is basically the same from all suppliers, it is important to create at least a perception of difference. A widget is a widget, but if a buyer thinks that my widget comes with better customer service, or that my widget is more colorfully packaged, or that my widget is environmentally friendly (i.e., green), or that my widget is organic or any of a host of consumer desires that change over time, then my growth rate increases at the expense of others in my industry. To win in this game a business must be aware of the tastes and preferences of its customers as well as the changing strategies of other companies in the industry.
The product life cycle is a sequence of stages that a new product goes through, from introduction to growth to maturity to decline. Most products, companies and even industries experience a life cycle. The duration of a cycle may be as short as several months for fad items to decades or even centuries for product categories such as business suits, appliances, or gasoline powered automobiles. Business investment and marketing strategies must change as a product moves through its life cycle.
The introduction stage is where a product is first introduced to the market. It is important during this stage for a company to determine its long run strategy. Though hit-and-run is a tactic that can make money, most companies choose a strategy that involves quality and longevity. Assuming the latter, during the introduction stage, a company seeks to establish a foothold by building product or company awareness. Sales efforts should be focused on a carefully selected set of customers or markets. During the growth phase, the firm should seek to build brand loyalty and grow market share. If the product is successful, competitors will enter the market during this phase, so awareness of the competition is important. The next stage is maturity. Here, competition can be fierce and the main goal should be to defend market share while maximizing profit. Advertising must be aggressive and price or other incentives should be considered to encourage current customers to remain loyal. Finally, the product will reach the end of its life and sales will decline. During this stage, profit is still possible; however, the future of the business must be new product development. Allowing a product to die off and moving forward are difficult but necessary decisions that are less painful if made sooner than later.
Whether sales are growing or shrinking, proper response is important. Knowing how to respond requires an understanding of why sales are changing and whether the change is temporary or permanent. Industry volatility and the product life cycle are two potential explanations for change but others, such as the economic business cycle or supply shocks, can also cause sales volatility. For better or worse, volatile sales are a fact of business, though as with most facts of life, knowledge and understanding is always preferable to ignorance and will lead to better decision-making.