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November 4, 2020A Key Performance Indicator (KPI) is a type of measurement to assess the success of an activity, individual, or organization. Generally, companies use different KPIs to measure the outcomes and results that the business is generating compared to the objectives and goals set in the beginning. In this article, we will look at retail KPIs that every retailer should track.
What are Retail KPIs?
KPIs differ depending on the industry and the growth phase of the business. They also depend a lot on the goals and objectives of the business. KPIs help the team and their managers to find out if the path taken by them is in the right direction of achieving the strategic goals or not. This is the reason why KPIs are required to be well-defined, measurable, and well-communicated throughout the company so that they can be used as an analytical basis for making key decisions.
There are some specific retail KPIs that stores use to measure their performance.
Moreover, different retailers use different KPIs based on the outcomes or strategic goals they intend to achieve. Some retailers might be more focused on improving the customer experience while others might just want to increase the sales of the business, and some wish for better inventory management.
The retail KPIs also aid you to understand the standing of the business in terms of sales, inventory, growth, customer services, and other factors. These are numbers that retailers must measure and track to determine if the business is achieving what it is meant to achieve. Herein, we provide you with the top retail metrics that retailers can track to gauge their store’s performance and decide the next course of action.
The top retail KPIs include the following:
1. Conversion rate
Conversion rate is one of the most common and important retail KPIs that many industries use to understand if a potential buyer is converted to a buyer. Many people visit retail stores. However, if these visits do not result in actual sales, it does not contribute to the business profits. Hence, retailers must use conversion rates to find out how many of these visitors convert to actual buyers.
The conversion rate is calculated by dividing the number of sales by the number of visitors to the store.
The conversion rate enables the retailers to understand how effective the new marketing efforts have been and how the changes in operational procedures have affected the sales. If the conversion rate is not good, retailers can think of making changes such as changing the store layout, improving the marketing campaigns, increasing the options of products and goods on the shelves, having more likable and convincing employees, or adjusting the inventory movement.
2. Sales per square foot
The physical area of developing a store is a huge investment for retailers. In addition to the land price, retailers also spend on the construction of the store, a store layout, arrangement of the shelves, and use of any empty space available in the store.
Therefore, it becomes significant for retailers to understand if the per square foot of the space dedicated to selling generates any sales. The formula for calculating sales per square foot KPI is dividing net sales by square feet of selling space.
The selling space means the part of the floor that you use for displaying products and excludes stock rooms or fitting rooms.
While planning the store layout or visual merchandising strategy, retailers must use this retail metric to gauge store productivity. It is one of the important retail KPIs that helps to understand if the retailer is making good use of the space available on the floor and if the fixtures are correctly positioned. Hence, you can call it a way to measure the return on investment (ROI) for a retailer.
3. Sales per employee : Retail KPIs
One of the retail KPIs that retailers can use to track the performance of employees is sales per employee. It also helps the retailers to understand and compare the investment made in every employee and the revenue generated by each staff member.
The value for sales per employee can be achieved by dividing net revenue by the number of employees. This metric is also useful to the retailers for scheduling the employees’ shifts, task allocation, training needs, compensation amount, promotions and incentives, and any hiring needs.
Retailers can put in place a POS system that can track sales per individual employee. It helps the retailers to identify the best performing employees, determine the sales target for each employee. It also decides the training needs.
4. Foot traffic
This Retail KPI also calculates the number of people who walk into a retail store, meaning the visitors to a store. The first and foremost consideration for any retail store is to get as many people as possible. Visits will only lead to sales.
As the foot traffic increases in the store, the probability of making a sale also increases. Furthermore, foot traffic metrics can enable the retailers to track how effective the marketing campaigns are. Moreover, how fruitful the window displays of the store are.
It also gives insights into customer behavior and response to changes in retailers’ strategies.
5. Customer retention : Retail KPIs
For retailers, it is extremely important to acquire new customers. However, repeat customers help you gauge whether the investment in acquiring new customers is a one-time payoff or leads to repeat purchases from the customer. The customer retention metric measures the number of customers that return to the store for the next purchase. Customer retention rate is calculated as:
[{(Customers at the end of the period) – (customers gained during the period)}/ (number of customers at the start of the period)]*100
Customer retention is one of the important retail KPIs. The retailers can assess new customers. Moreover it gives you insights in terms of product quality, customer service, and pricing. Customer retention helps to measure how loyal the customer is. Hence, the opposite of retention rate is churn rate as it measures the percentage of customers a retailer loses.
To improve customer retention metric, it is imperative for retailers to manage customer relationships better. You can do it through personalized services, loyalty benefits programs, and community-building efforts.
6. Inventory turnover
The biggest concern of retailers is getting the inventory ‘just right’ all the time, which is most difficult to achieve, but it is possible. Inventory turnover is a critical metric used by retailers to find out the optimal level of inventory.
This retail KPI is calculated as the cost of goods sold divided by the average inventory. It also measures how many times in a calendar period. Furthermore, a retailer finishes the sale of its inventory and replaces it with new.
If the number is too high, that means the retailer is not able to stock up enough goods for sale. Hence, customers have to face frequent ‘out of stock situations. In this case, You discourage customers from stepping back into the store, reducing the customer base.
If the number is too low, that means retailers are not able to gauge the demand correctly. Hence, carry a lot of dead stock and over-order the products.
7. Sell-through
This retail metric enables retailers to understand how much of the inventory is being sold in comparison to what was purchased.
It is calculated by dividing the number of goods sold by the inventory at the beginning of the period, and the result is multiplied by 100. Through this retail KPI, retailers can determine which products are selling and which are not and hence, can change their purchasing decisions accordingly.
A high sell-through rate means that retailers must stock up well for the merchandise, as its demand is high. A slow rate means it is not popular enough amongst the customers and needs good marketing efforts.
Retailers can also remove the products with lower sell-through rates and replace them with high sell-through rated products.
8. Year over year growth
To make the business sustainable, retail stores need to clock growth every year. This retail KPI also calculates the percentage change in growth during the last year, meaning to check the continuous improvement of the business. Year over year growth enables retailers to identify the long-term trends and make plans accordingly. It is calculated as:
{(revenue for the current period – revenue for the previous period)/revenue for the previous period }*100
If you see a rise in the growth in the current year compared to the previous year, that means you are doing it right. However, if there is a downward trend, then you should identify reasons and take remedial action. The downward trend might be due to multiple factors. For example, changes in the market demand, growth of the competitor as against your business, or failure in understanding the customers’ needs and wants.
9. Gross and net profit
Measuring profits is the most common measure for any business. Moreover, retailers must know if they are making money from the business or not, and gross and net profit help them in gauging that. Gross profit is calculated as sales revenues minus cost of goods sold while net profit is calculated by deducting all expenses from all revenues.
If gross profit is on the lower side, retailers need to focus on lowering the cost of goods or probably look for other suppliers.
If the net profits are less, then you should streamline operations to lower the operating expenses. Moreover, both these retail KPIs enable the retailers to conduct proper planning for their resources. It also helps introduce cost-cutting measures, and bring new business strategies.
10. Average transaction value
The average transaction value is calculated as the total value of all the transactions divided by the number of transactions. This retail metric also helps to comprehend people’s spending on products on average. It is one of the important retail KPIs used to determine pricing policies and product strategies and understand the customers’ interaction with the retail store.
If the value of this metric is high, that means either customer is buying larger quantities or expensive products while a low value indicates that the customer is purchasing a fewer number of products or low-priced products.
Furthermore, retailers can gauge the purchasing pattern of customers and work on their marketing strategies and promotional campaign. It improves the sales volume through sales tactics such as bundling, upselling, or some offers. However, you should check the relevancy of these sales tactics, and ensure their value. Hence, it does not affect customer loyalty negatively.
Conclusion
In addition, there is many other retail KPIs. For example, online sales versus brick-and-mortar sales, gross margin return on investment, shrinkage, sales per category. It also includes breakeven points, product returns, shopper dwell time, customer satisfaction, and many more.
However, the intelligence lies in selecting the right retail KPIs for your store depending on the current business goals. It also relies on existing industry situations, challenges to overcome, and priorities. You should measure such retail KPI frequently so that it can facilitate the retailers to improve the performance.
There are retail dashboards and analytics available to track these KPIs automatically. It is better for retailers to measure these KPIs regularly so that they can track performance. Hence they can make smart decisions and grow their business.
