When you own a small retail business, you may feel that it is early to pay attention to specific pieces of information. One thing you need to know is that your competition has not hesitated in tracking its performances, making use of the data, and improving its business process.
No matter the newness of your business, knowing how your business is performing both theoretically and practically is imperative. KPI in retail can allow you to achieve that as below.
- KPI for your Retail Business
- Gross Versus Net profit
- Gross Margin Return on Investment
KPI for your Retail Business
The retail metrics discussed here should assist you in understanding your sales, the customer, and the inventory in your storage, growth, and transactions.
1. Conversion Rate
The main goal of any business is to convert a prospective customer into an actual buyer of your product and service. The conversion rate KPI allows you to understand a section of people that visit your business and end up buying a product.
An example is that 50 people visited your shop, but just 10 of them bought something. You can use this rate to develop a more successful business by making the best use of the data generated from this calculation.
Also read: How to Implementing KPI – Step by Step Guide
You can arrive at the right solutions for your business by comparing the conversion rates to other retail metrics as well as business efforts such as marketing and operations.
Solutions may come in the form of working on the layout of your storage facilities, boosting your workforce, improving your inventory engagement as well as considering other marketing options.
Another way of using your data is to compare it with a previous achievement of the same metric. This approach can easily tell you whether you got it right or wrong.
Remember that different retail businesses have different conversion rates. Your plan should be to have a better conversion rate than competitors in your business.
There are many recommendations for improving your conversion rates. The first one is to build a good relationship with your customers.
Another way is to develop a likable customer team that can offer guidance to the customer on inquiries and leads to a sale. Lastly, be kind in your call to action; being pushy can push away some customers.
2. Sales per Square Foot
Inventory is an important aspect of your retail enterprise. A key KPI example is the Sales per square foot parameter. This KPI allows you to track your stock. The result is a proper inventory management system.
Key inventory management solutions you may implement after a sales per square foot analysis include the reception of purchase orders, which allows you to reduce shortages in stock.
Another good implementation includes adjustments to your inventory. This feature allows you to tweak storage options for healthy items, lost, stolen, and damaged items.
You may also want to implement proper stock management. Here, you create inventory, serialized, and non-inventory items.
Sales per square foot is another option for calculating your return on investment. Moreover, this metric allows you to arrive at your rent for your business location.
As you arrive at this metric, know that the place of selling is not considered a storage space. The same applies to your display space.
However, the usable selling floor makes up part of the sales per square foot. Ultimately, to arrive at this KPI (sales per square foot), you will need to divide the total net sales by the selling space in square feet.
3. Sales per Employee
As you try to understand the sales you make for every storage space your goods occupy, you need to know how much each employee brings to the business in terms of the sales.
Not only do you know how much they sell, but this can be a parameter for measuring the employee’s performance and their contribution to the revenue.
Sales per employee data can allow you to devise a reward system for your employees, starting from training to compensation.
You can arrive at this rate by dividing the net sales by the number of employees. Apart from calculating this manually, you can arrive at this figure using POS solutions. The data you get can be used to make informed forecasts.
There are multiple ways you can improve this score. Foremost, you could set targets for each employee. Let the goal be smart to increase its achievability.
Another way you could boost sales per employee is by equipping your staff with sales skills. The most common method of attaining this measure is to motivate your staff to perform better.
Gross Versus Net profit
Usually, when running any business retail or not, you may view profit as just the difference of how much it cost you to buy that product or manufacture it and the much you sold the product. The question is whether this is the best way to look at this metric.
Luckily, two items, gross and net profit, are the two aspects of profit you need to understand. When you understand these two items, you can easily know the financial health of your company.
The gross profit margin refers to the margin of profit related to the earnings in every dollar of sale. The margin grows every time a sale occurs.
1. Gross Profit Margin
Foremost, a profit margin is a measure indicating the much a company earns for each dollar of sales. For a company to be said to have an impressive margin, the company ought to net more money for each sale.
The gross profit margin, on the other side, refers to the percentage of the revenue, which supersedes the cost of the product or service.
This profit margin can also demonstrate the performance of executives by paying attention to revenue generated against the production cost for the goods.
A higher margin means that your enterprise can generate a profit for each labor-related investment made.
To arrive at this figure, find the percentage of the difference between overall revenue and cost of goods production divided by the total revenue. Remember that this figure must be in percentage form.
2. Net Profit Margin
This measure refers to the ratio arrived at through the relation of the net profits with the revenue of the enterprise for a particular period. This margin is expressed in percentage form and refers to how every dollar made by the business gets becomes a profit.
The truth is that any revenue increase may not directly become a profit for the enterprise. It is good to understand this difference so that you do not contradict yourself.
Arriving at the net profit is, therefore, the gross profit (a result of the difference of the revenue and cost of production) minus the overhead expenses such as taxes and interests.
Gross Margin Return on Investment
Also known as a GMROI, this KPI tells you whether you will earn adequate gross if customers purchase your product. This measure, therefore, helps you estimate the much you can make from investing in your inventor to get the stipulated gross margin.
The idea is that if you invest $200,000 on average on your stock and get $ 1 million, then this is a good thing. It gets even better when you spend $150,000 to get that $1 million.
Arriving at GMROI is, therefore, as simple as the gross margin divided by the average inventory cost.
1. Sales per Category
If you have a general retail business, you may be selling more than a single product. This metric means that your products will fall into different categories. A good seller may want to know how each category performs.
Any issue with the sales may require carrying out several things to improve sales for that category. Some solutions may include investing a significant amount in different versions of the product.
Another solution may be repackaging your products, improving the positioning of the product in your retail store, and staff numbers for better customer service.
2. Average Transaction Value
This value is arrived at by the overall value of all business transactions with the overall number of transactions or sales. If sales in a particular year are $200,000, and the sales or transaction is about 10, your average value of the transaction is approximately $20,000.
When people do this calculation, they tend to make several mistakes, such as overlooking the costs incurred during the transaction. Moreover, they use a particular cutoff period, which means that every time the sale does not go as planned, some costs of the transaction miss.
Another mistake may be that you sell the product unimaginably high just to improve the average transaction value.
The average transaction value can be arrived at by dividing the overall number of transactions by the period for that desired outcome over a particular period.
There are common mistakes committed when arriving at this value. Foremost, you may be putting all transactions together and treating them as one sale.
Secondly, you may have divided one specific transaction into multiple sales. Lastly, you may be using data from a particular period and even considering season occurrences.
3. Units per Transaction
As a retailer, you have access to a significant amount of items. For this reason, you may find it appropriate to pay attention to the unit per transaction metric. Another name for this concept is items per sale.
Keeping track of items for each allows you to arrive at the trend of sales in your business. Other items under these metrics include the sales over a particular period and the contribution to sales by each employee.
This measure also tells you whether the revenue increase is a result of whether people are buying goods or they are buying the costly ones. To arrive at the units per transaction parameter, divide the items sold by the transactions involved.
An example is that you sold 15 items over a particular period, and it included 3 transactions. The units per transaction value will be 15 divided by 3 to make five units per transaction.
4. Online Versus Brick and Mortar Sales
You can arrive at this value using a POS tool. This is an important retail metric because it brings about supports a business strategy that stresses the use of multiple channels to grow the enterprise.
For instance, for eHopper, you only need to export the sales report on the tool. With the report on the tool, all you need to do is to narrow it down by filtering sales into two namely online sales against brick-mortar sales.
Once you have a point of sale is established, track online versus in-store, and decide on the best way to drive the KPIs of your retail enterprise.
5. Year over Year Growth
This is a comparison metric that spans a year from a current period to the same period the previous year.
This metric comes in the form of a percentage change between the two periods spread over twelve months.
The year-over-year measure allows you to avoid the effect that seasons may have on performance.
As you pay attention to the year-over-year growth metric, it is essential to celebrate the small wins that surface on the curve occasionally.
Always try to question whether it is an excellent performance from typical sales efforts, or the performance is due to high selling seasons like holidays. Compare this result with that of the previous year to know whether it is a growth or a decline.
The good thing about this metric is that it can show you the long-term trend. You can also closely track sales by paying attention to month-over-month growth.
When calculating the year-over-year growth, pay attention to current and previous year sales. The result is their difference; current minus previous. A positive result means growth, and the reverse will mean a loss.
6. Break-Even Point
It is the joy of every business to start becoming profitable. You will hear many business persons saying that their business just broke even.
The break-even point is a metric that shows the time in a business when the sales of the enterprise become equal to the expenses of the enterprise.
Simply put, there is no profit or loss made by the company. For you to get the break-even, divide the fixed costs by the gross margin percentage.
Shrinkage refers to a situation where your business loses its inventory. Shrinkage is usually a result of shoplifts, theft by employees, clerical errors when recording inventory, and damage to goods during shipping.
To get the inventory shrinkage physically, enumerate your stock, calculate the cost of the items, and subtract the cost from the cost in your accounting records. To arrive at the shrinkage, divide the physical count with the amount on your accounting books.
Remember that the shrinkage needs to be in percentage. The result above therefore needs to be multiplied by a hundred. You then get to compare the percentage with that of the previous time you calculated the shrinkage.
8. Foot traffic
Any brick and mortar retail store have foot traffic, which is one of the most important parts of any business. The term is, therefore, common for anyone that owns an enterprise. When your business has a lot of foot traffic, it should also worry you.
The dream of any business is to have as many clients visit its premises and buy from it. It might be challenging to arrive at foot traffic in your business, but it is achievable.
Simply have a click and keep track of customers entering the floor every day or have a floor manager do the tally the whole day. Another way is to have a camera record the entrance the whole day and later watch and count the customers manually.
Today, some tools can do the counting for you. These methods tend to be accurate, and the manual method tends to be more accurate.
9. Customer retention
Customer retention is a retail metric responsible for measuring the frequency of returns customers have previously bought from your store. This metric demonstrates your organization’s capability to increase the loyalty of its customers.
One way to boost this metric is by implementing a loyalty program. A loyalty program converts your new customers into recurrent customers. A higher retention rate means higher profits for your company.
In multiple studies, it is clear that returning customers spend more than newer customers at a percentage of up to 60 percent more.
Other studies also reflect that acquiring a new customer is more expensive at a rate of up to 6 to 7. Additionally, most businesses owe between 25% and 40% of their revenue to recurrent clients.
Another important statistic is that a simple 5% incline in customer retention increases the revenue by 25 to 95 percent. Therefore, any business needs to invest heavily in maintaining its old customers because they will always spend highly on the product.
To arrive at the retention rates, calculate minus customers that buy goods at the retail store from the customer number gained at the time of your calculation period.
You will then divide the outcome customers number you began with by multiplying it by 100 to get the retention rate which is usually in percentage form.
As you pay attention to retaining customers also pay attention to the churn rate, which is the percentage of customers lost in that period.
10. Shopper Dwell Time
Today retail businesses have evolved into the online space. Any customer that chooses to go to a physical retail store does it because they have a reason for doing it.
Moreover, because a customer has a reason to call you. There are multiple ways you can net customers, such as broadening your product range and offering intensive customer service, such as the assembly of difficult products such as furniture.
Whereas these have been the old reasons for people going to physical retail stores, the convenience is slightly short-lived today. Still, people find reasons to visit physical stores such as trying a product before buying it online.
The success of retail stores in improving shopper dwell time is now dependent on multiple channels to tap into customer habits. Furthermore, to increase sales, there is a need for research to tap into the needs of customers in modern stores.
You could build your retail business based on the data from this retail KPI. The dwell time KPI helps you to understand the thinking of your customers. Moreover, you begin to understand the places within your store where your customers spend most of their time.
Other metrics related to your retail store include waiting and hold times, transaction times, and service times. Furthermore, the dwell time metric is a good indicator of customer engagement.
The idea of paying attention to the shopping dwell time is to figure out a way of positioning your products within your store such that shoppers are attracted to purchasing the product.
11. Inventory Turnover and the Sell-Through Rate
The inventory turnover refers to the number of times at a particular period when the retailer sells all the stock and replaces it with another. You can arrive at the inventory turnover by dividing the net sales by average retail stock.
The sell-through rate on the other side is the metric comparing stock sourced from supply versus the stock sold to customers. This metric is usually in percentage form and is arrived at by dividing units sold by the units received from the supplier.
For instance, if you received 200 light stands and sell only 40, your sell-through rate will be 40 over 200 by a hundred, giving you a value of 20%.
It is good for any retailer to note that the more items stay on a shelf, the more money it costs you. All you need is to replace those shelves with products with the sell-through rates.
Understanding your retail business is essential in capitalizing on the opportunities it offers to you. Excellent retail KPI metrics can do that for you, which is why you need to take your time with what each parameter offers to you.
The above are demonstrates you may find important. All you need to do is to start now and find out about the performance of your retail business and what you can do about it.