What is contribution to growth, why beyond pure year over year, contribution to measure is actually more relevant... and how to calculate it. This post is part of our serie regarding sales forecasting and how to build a forecast. You definitely should read it!
Contribution to growth is a key component to measure growth
Contribution to growth allows to understand the growth drivers. The underlying question, when you measure the growth between 2 periods or more, is to understand the importance of the drivers behind it: which dimension contributed really to the growth, which didn't and contributed to more a softness. As you might already probably know, not all the dimensions (products, countries, ..) contribute the same to the overall observed growth, the weight of each segment needs to be factored in.
Intuitively, this is easy to understand.
Let's consider the following example. Imagine that the overall GDP accross the globe is around +1%. Countries like China or the USA will definitely have a bigger impact that other countries like Senegal or Lesotho. That's a fact. How then, visually, to compute the contribution to growth for each country, the sum of this being 1%. The same applies for your product or customers. Not everyone is contributing the same to your overall YoY growth performance and having the possibility to make the distinction between those who really drive the growth rate is key for the success of your business.
Contribution to growth is answering this issue: CTG is the weighted contribution of each dimension or driver to the overall observed growth.
As you could imagine, CTG (Contribution to growth) measurement is hence extremely useful for FP&A departments and business owners who to understand the impact of each variable to the overall growth, given their size.
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Who can use contribution to growth on a daily basis?
The answer is pretty easy: every person who needs to explain why a business variation occurred will need to use the contribution to growth as a simple but relevant and powerful metrics. You could be a financial analyst having to report every week the performance of the activity - and might want to capture what have been the drivers in the year over year growth observed, in a way that your management will understand. You could be a marketer who wants to understand more about the behaviour of each customer segment, after having performed a customer segmentation. In an other domain, you could work in logistics and want to understand the contribution to growth of each product category let's say on the overall growth of your stock.
As you can see, almost every one throughout a company can use contribution to growth metric to understand the performance of its perimeter - and it's evolution on a year over year perimeter.
So, how do I calculate contribution to growth ?
Let's say you want to compute the year over year growth from 2 years.
- Year N = 100
- Year N+1 = 130
The YoY growth is easy to compute, it's basically +30%.
Now, let's imagine that these numbers have the following breakdown - here we assume we want to analyze the contribution to growth of each product, but it could have been any other relevant dimension for your business:
|Dimension||Year N||Year N+1|
A quick analysis will tell you that, while the total has been growing year over year by 30%, product 1 grew by +25%, Product B by +20% and product C by 50%.
|Dimension||Year N||Year N+1||YoY growth rate (%)|
Product C is way lower than product B, but as you can see, the overall incremental volume is coming from product C. How can this be captured immediately?
This is precisely the role of the ontribution to growth formula, which is to allow to quickly capture the top contributors regarding the total number.
CTG is the sum of each individual product growth, relatively to the overall total. To be more explicite, and using the same example, this will give for product A: ((25 - 20) +100) / 100 - 1 = +5%.
|Dimension||Year N||Year N+1||YoY growth rate (%)||Contribution to growth (Pts)|
|Product A||20||25||+25%||((25-20) + 100) / 100 - 1 = 5%|
|Product B||50||60||+20%||((60 - 50) + 100) / 100 - 1 = 10%|
|Product C||30||45||+50%||((45 - 30) + 100) / 100 - 1 = 15%|
||(5% + 10% + 15%) = 30%|
Where contribution to growth is even more interesting...
Now, let's imagine, that you have a Year N+2 and that you are still monitoring the evolution of your overall business growth. You might now want to understand which are the products slowing down or accelerating your growth. Those who work for a start-up perfectly understand that monitoring the growth driver carefully is critical - even more those contributing directly to the acceleration or deceleration of the activity.
Using the same example and the same formula, you would have the following data - have a look at the latest column on the right:
|Dimension||Year N||Year N+1||Year N+2||CTG N+1 / N||CTG N+2 / N+1
|Product A||20||25||30||5%||3.84%||-1.16 pts|
|Product B||50||60||60||10%||0.00%||-10 pts|
|Product C||30||45||40||15%||-3.84%||-18.84 pts|
Once calculated, you can now clearly see that product C has had the strongest impact on the growth of your business, contributing massively to its softness. It went from +15% CTG in year N+1 versus N to -3.84% in Year N+2 versus N+1. The weight of the product is factored in when you read and analyze your growth rate.
This is quite important in terms of data storytelling when you pitch a story to your executive committee.
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