Outselling Yourself: Maximizing Retail Performance With the Right KPIs
January 11, 2018
You can’t manage what you can’t measure. For retail business owners, the challenge isn’t the ability to measure — it’s deciding which key performance indicators (KPIs) to keep an eye on.
Depending on your sector and distribution channels, some retail performance metrics will matter more than others. It will take experimentation to sort out which metrics are most useful. But putting in the work will allow you to make informed decisions about the best tactics and strategies for your business.
Here’s a look at the most useful KPIs for retail stores, which could help increase efficiency and boost your bottom line.
A Matter of Margins
The ultimate retail performance metric is also a universal indicator of success: profit margin. The most straightforward measure comes from dividing your gross profit by your total revenue for a given period — typically a full year to get a percentage figure.
What’s a good margin number? As with other KPIs, an apples-to-apples comparison to other retailers in your sector is vital. Look at your margin over time: Is it going up, down or sideways? Up is usually good, of course — unless you’re just inching upward and your peers are showing meteoric growth. Down is bad but also relative. Sideways can be good or bad, depending on the details.
Another way to assess your overall financial performance is to take your gross profit and divide it by the total cost of inventory purchased over that period. This metric is known as the gross margin return on investment, and it essentially tells you the degree to which you’re choosing the most profitable things to sell.
Quantifying Your Sales
Having data is excellent, but you also need to understand what the information means. Here are seven crucial retail sector-specific KPIs to consider:
- Foot traffic: This measures how many people visit your store over a given period. Watching daily (or even hourly) trends will help you to gauge the success of promotions and to schedule your staff. Tools to help you measure foot traffic range from low-tech counter devices to electronic monitoring systems.
- Sales count: This fundamental KPI tells you how many transactions occur over different periods of time. Like foot traffic, it helps you assess marketing efforts and make staffing decisions.
- Conversion rate: This KPI is the percentage of people who came into your space (i.e., your foot traffic) who purchased something. Naturally, the higher the conversion rate, the better. But it can be most helpful in gauging the appeal of merchandise, as the merchandise changes. A rising conversion rate can reflect better products, better prices or a better sales staff.
- Inventory turnover: This is the ratio of your cost of goods sold to average inventory over a given period. The higher the number, the less time inventory has been sitting around gathering dust. A higher number also means less money tied up in inventory, which is expensive in terms of capital cost and rent. A low turnover rate would also suggest you’re not stocking the right merchandise.
- Sales per square foot: This retail performance calculation method tells you how well you’re using your space. The higher the rent, the more critical this KPI is. Some large retailers get very detailed in analyzing this KPI by measuring it for different parts of their retail space. Some retailers even measure space by linear foot of shelf space rather than area.
- Average transaction value: This calculation reveals the average amount of money customers spend each time they come to your store. If the value is relatively low, that could have implications for your pricing strategy and suggest that stepping up efforts to up-sell customers with package deals and other tactics could be productive.
- Sell-through rate: This is the percentage of your inventory of a particular product sold over a given period. It tells you how well you estimated the demand for the product, and whether any adjustments are needed in the volume of the stocked product to avoid running out or needlessly clogging shelves.
Summary: Measure What You Manage
As you gain experience using KPIs, you may narrow the list down to those that are most useful for your business.
You might also create unique KPIs for your own operation.
Your goal shouldn’t be measurement for measurement’s sake, but instead using KPIs to maximize the profitability of your business. Focusing on the right data points will help you make informed decisions — and effectively measure what you manage.
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