How to calculate KVIs, and why are they important?

What is a KVI?

Key Value Items (or KVIs) are the most important products in any retailer’s catalog. As the name suggests, these are items that customers perceive as “good-value” products in your store and are likely to represent the basket-starters.

As a result, these are the products that need to be competitively priced and the products that drive the largest volume of sales for the retailer. However the margin on KVIs also have to be thoughtfully modeled because they represent such a large part of the P&L for the retailer.

Why are KVIs important?

Identifying KVIs correctly and then regularly refreshing this list enables retailers to set up clear strategies against these SKUs, which has follow on effects for the entire business. Some ways in which these strategies are applied are

1. Running higher frequency checks of KVI inventory to make sure that you never run out of these products.
2. Refreshing competitor prices for KVIs to ensure that you are competitively priced on these products.
3. Applying Everyday Low Pricing Strategies (EDLP) to KVIs to make sure that you don’t turn away potential customers

However, correctly identifying KVIs for any retailer is tricky, and getting it wrong is expensive. The most naive approaches simply look at the Top Sellers in the product catalog and sort by number of sales. This is a bad approach because it is possible for a product to represent a huge volume of sales, but not represent the products that customers are most price sensitive to. 

So this blog is a tactical how-to guide on identifying and publishing KVIs for your business.

What should be included in identifying a KVI?

When calculating a KVI, you need to account for three overall characteristics in the product

1. Products that were ordered very frequently in the recent past – ensure that frequency is calculated as unique baskets containing items, and not as absolute number of items sold.
2. Products that represent a “good value” – products that are inexpensive compared to the rest of your SKUs within that category.
3. Products that are elastic – products that users have a high price sensitivity to

Each of these components should be included in calculating a KVI score and assigning to each SKU. 

Additionally, you want KVIs to account for between 15 to 25 percent of sales as advised by Mckinsey. This is our cutoff threshold for identifying KVIs at a category level.

Implementing a KVI calculator

When implementing a KVI calculator, follow three distinct steps

1. Gather the following three distinct metrics – 
   1. Last 30 day order frequency, by unique baskets
   2. List Price
   3. Most Recent Elasticity computation
2. Normalize each metric and take a weighted average to calculate KVI score -
   1. [weight1] * Last 30 day order frequency, by unique baskets
   2. [weight2] * List Price
   3. [weight3] * Most Recent Elasticity computation
3. Sort products by resulting KVI score and take the top N until we reach 20 percent of sales.

It is important to re-run this process on a weekly or monthly basis, identifying SKUs that are entering and dropping out of the KVI categories.

Additional Considerations

Once a good baseline of KVIs are established, the following additional considerations should be added to KVI calculations

• Anticipate Seasonal KVIs: Turkey during Thanksgiving or Ice Cream in the summers are examples of seasonal KVIs. To add more nuance, one way to calculate KVIs is to look at week-over-week change in order frequency.
• Identify “value shoppers” and incorporate as a signal for KVI: Segmenting customers and identifying their shopping behaviors in calculations for KVIs.

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