The Crucial Retail Metrics With KPI Examples
|Retail KPIs Examples|
When you're running a retail business, you know how easy it is to lose focus from your goals and performances. Leaders in this business have to juggle numerous aspects like payments, salaries, inventory, invoices, and many others. It often happens that while you are too busy with your everyday tasks and struggles, you kind of get lost and forget what your long-term goals are and why you began doing this business after all.
Everyone who's running a successful business knows that the numbers don't lie. But maybe you don't know how to use numbers and data to put extra money in your pocket? If you want to grow retail sales performance, your first step is to follow and measure KPI retail metrics properly.
If you don't track your key performance indicators frequently, you may not even notice the gradual drop in your business performance until it's too late to correct anything, and your company gets severely damaged. Without the data, you will not know what's operating well, what's failing, or even what success looks like. That's why you need to track your vital key performance indicators, as they will help you evaluate how good your company is performing towards your goals and overall strategy.
KPIs are the crucial metrics for your business, and they represent the numbers you want to monitor every day to check how good your business is developing and achieving targets. Every retail business is different, and some metrics may be more meaningful to you than others.
We gathered the most important key performance indicators in the retail business, so check our list below and find KPIs that will fit your company's goals. For every objective, you should pick at least two KPIs to monitor the performance. As we mentioned before, every retail store is different, but there are base KPIs that should be the foundation of every retail business performance metrics.
Retail KPIs Examples
This fundamental retail KPI measures the proportion of the store's visitors who made a purchase and became leads. The overall goal of every retail business is to convert sales. The higher the conversion rate is, the higher the profit and success of the company.
How to calculate your conversion rate? Easily by dividing the number of visitors with the number of individual purchases x 100. For instance, if 400 potential customers visit your store in one day, but only 40 of them actually buy something, your retail conversion rate is 10%.
If you want to establish your retail conversion accurately, besides measuring the number of your visitors, you will need to learn how to interpret the data.
Conversion rate is directly related to marketing, and it can evaluate the efficiency of marketing efforts and its operational actions, such as changing your store's layout, adjusting stocks, organizing campaigns, and so on. Check your conversion rate and think about the things you could do to attract customers and convert them into leads. Before you make any changes that will impact your conversion rate, measure it to set a benchmark, and then compare it to your conversion rate after the action.
If your business is selling clothing and apparel in a brick-and-mortar, your conversion rate is something between 20% and 40%, meaning around 70% of your visitors leave your store without buying anything! The conversion rate differs from industry to industry, but be aware that it's never 100%, even if you're selling ice creams on a hot day! In order to succeed, your conversion rate needs to be higher than within your competitors.
You should monitor this KPI daily, and interact with your sales team and sales manager to update them with this KPI's performance and discuss possible actions and areas for improvement.
Sales per Square Foot
This retail business KPI measures the average revenue for each square foot of sales space. Sales per square foot exclusively cover the space you use for sales, and it doesn't include fitting areas, storage space, offices, and other additional rooms.
In this business, it's pretty challenging to maximize and use limited sales space to display goods you sell, in the best possible way.
This KPI isn't specific, and it can't show you which product is selling the best, but it can reveal if you are using your space efficiently enough.
If your sales per square foot KPI rate is low, it might be a sign that your inventory isn't popular, or it's not appropriately displayed to boost your sales.
If you want to track this KPI in your retail business, you will need a complete revenue data for the period you want to measure, and accurate information about your store's square footage, excluding any non-sales spaces. How to measure this KPI? Start by defining your net sales, which you calculate when you take gross sales minus any returns. The rate you get for the net sales divide with the number of your sales space's square footage.
What sources should you use to track this KPI? Using the customized retail dashboard, you can follow all the sources related to your sales per square foot, in one place. The crucial data points include your CMR for gross sales and returns and your current floor program to define your sales space's total size.
For example, you just redesigned your store after getting a new inventory, but your sales rate dropped lower. The products you're selling are generally in demand, but figures are telling you a different story, your sales aren't boosted, they're dropping lower. Then you use sales per square foot KPI to determine if the problem is related to the arrangement of your store and whether your team is maximizing the space to get most out of it.
If this measurement indicates that the layout of your store is perfectly organized, consider the possibility that the products you're selling aren't popular enough, and try finding products that are currently hot on the market.
How do you improve your sales per square foot:
- Update your store layout
- Have an attractive product collection
- Optimize your prices or promotions
- Boost transaction or basket value
- Train your team to sell more
- Encourage people to stay longer in your store
Sales Per Category
This KPI in a retail business is measuring the percentage of sales generated by a product category from overall gross sales, and it's showing you the performance of a particular product category in general sales value.
Sales per category KPI is mainly used when a business is launching a new product category, in order to evaluate customers' interest and category success on the market. Also, you can use this KPI for individual items, without grouping all products from the same category. But in this case, you can only compare it to your other products in the same category.
Usually, retailer revenues can be mainly related to sales registered for multiple item categories rather than the sales of distinct brands. This KPI's rate is expressed in percentage, and it's crucial for the efficient management of one product category, and therefore for the overall revenue.
Category management is a retail process through which a specific product group is managed against the various related product or category features, like price range, usage, quality, and so on. The objective of this process is to determine an item's or the whole category's profitability and the optimal stock levels compared to actual sales.
Category management process has two steps :
- The first step consists of composing a taxonomy for the entire offer by dividing the entire offer into sub-categories according to the similarities among those products and their utilization. For example, a supermarket's categories would be household products, fruits and vegetables, drinks, bakery, and so on.
- The second step, in the case of retail businesses with an extensive range of products in their offer, would be dividing items into sub-categories. For instance, in supermarkets, drinks would be divided into bottled water, natural juices, alcoholic beverages, etc.
Every product category should be treated and managed as an independent business unit by developing strategies, with objectives and targets. Moreover, the complete business should be analyzed as an entirety of product categories, whereby profitable or in-demand categories should be maximized, and less profitable ones should be reduced or entirely dismissed.
Other tips for tracking this retail KPI include:
- Placing targets according to financial and business goals, profitability, and buyers' needs as well as customers' satisfaction;
- Considering the fact that particular product categories don't cause a significant profit, but they can influence and increase consumer traffic;
- Appropriate dedicated software that will offer opportunities, like designing, analyzing, and forecasting taxonomies for a multi-faceted program towards category management.
Sales Per Employee
This KPI has one other alternative name, revenue per employee, and it's a measure of the total revenue for the last twelve months divided by the current number of full-time equivalent employees. Sales per employee key performance indicator is universal KPI in the retail industry, and it's mostly used for comparing different companies within the same sector to determine the level of performance.
This KPI will help you determine a sales baseline, set individual goals, and determine the strengths and weaknesses of every employee. For instance, some employees may need more time to seal deals, but when they do, customers stay longer and purchase repeatedly. Don't use sales per employee KPI to create an environment that is first and foremost about competitively comparing each of your sales employees against each other.
Gross and Net Profit
The gross profit will show you how much profit you made after deducting the expenses related to creating and selling the product. It will tell you how your selling expenses are influencing your profit. How is it calculated? Simply by taking out the costs of goods sold from the total sales revenue.
The net profit will show you how much profit you made after taking off the expenses of your products along with all other business costs, including operating and administrative fees, etc. To calculate your net profit, use the equation all revenues minus all expenses.
Why is it essential to measure the gross and net profit? These two will indicate whether you actually have a profit. It's not enough just to generate sales and good revenue. You need to actually make money at the end of the day out of your sales. Measuring and following these key performance indicators will help you make better strategic decisions in multiple aspects of your business.
For example, your gross profit is dropping low, and by realizing this, you need to check whether your product sourcing is actually good and profitable and determine any actions that will lead you to lower your expenses of products. If you're not getting enough profit, consider taking measures that will reduce your operating costs.
To improve your gross and net profit, you can try some profit-increasing strategies in your business, like:
- Streamline your operations to decrease costs
- Raise your prices
- Boost your average order value
- Implement savvier purchasing methods
- Optimize your vendor connections
When your profit margin drops, it's usually because of a variance in one of these two metrics. Let's say your profit margin drops, and when you look at your gross profit, everything looks like usual. Then you look at your operating margin, and you realize it dropped significantly. This can mean that your store has taken on higher overhead costs, and to correct this issue, you should analyze your expenses and try to find areas where you can cut costs.
But what happens when your gross margin drops, while your operating margin remains the same? Your gross margin is directly related to the charges you pay to sell your products, and your inventory is probably the cause of your problem. Maybe your supplier raised the prices of your goods? If that is the case, you can easily increase your gross margin, and consequently, your net profit margin, by discovering a new supplier or by excluding the high-cost goods from your store. If you take some of these actions and your net profit margin starts to increase, you solved the problem.
Oscillations in your retail business may feel mysterious. Still, if you track these KPIs, you can recognize and correct the problems before they make a massive negative impact on your business.
Gross Profit or Net Profit?
Let's take a look at whether you should measure gross profit or net profit.
You get your gross profit by calculating revenue minus expense of products sold and direct costs. Your direct costs represent those costs that scale in direct proportion with sales, such as shipping expenses from your carriers, and they are also known as variable costs.
To remind you, this is how gross profit is calculated:
Gross Profit = Sales revenue – Cost of Goods Sold (COGS) + Direct expenses (variable costs)
From your gross profit, you will need to pay your other business expenses like wages, marketing, rent, and so on. Once you pay them all, net profit is what you are left with. You can calculate your net profit like this:
Net Profit = Gross profit – Overheads (fixed costs)
Let's suppose that your fixed costs are pretty much stable. Short of firing workers or shutting down a warehouse, you're not going to be able to influence the net profit much by making day-to-day purchasing, selling, or marketing determinations. Your net profit report utilizes more data from your accounting software, which indicates that you need to perform all your bookkeeping processes before you can see what's happening.
Information you get with the gross profit is much more useful. This data is instant, as soon as you place an order, you will know your sales revenue and all expenses you had to pay for products and carriage to the customer. You will also have information about variable expenses associated with every sales channel. Also, if you report your expenses appropriately, you can get enough information in the gross profit data so you can make the right decisions that will positively influence your inventory purchasing, channel management, and marketing.
Average Transaction Value
This KPI measures the average value your customers are spending on each purchase. Higher rates indicate that your customers are buying more expensive products, or they purchase multiple products with every sale. Average transaction value is a handy KPI for defining pricing and product strategies. Maybe it's not the most specific measure, but the perception about your average transaction value, or ATV, can provide you with a good idea of how your consumers are interacting with your goods.
The core benefit of average transaction value KPI is the ability to highlight how much your customers are spending at your store, which will help you recognize how good your pricing strategy is playing. If the average transaction value is low, that indicates that your goods are underpriced, pr you maybe need to develop better sales strategies to encourage and enhance more spending.
This KPI is one of the easiest to measure across the retail business and analytics space. First, you need to calculate your total revenue for the period you're measuring and then divide it by the total number of transactions handled over the same timeframe. If the rate is high, it indicates that you're selling goods in more significant quantities, or your buyers are purchasing more expensive products. Lower rates show you that your products are underpriced, or your customers aren't buying enough products.
Inventory turnover or stock turnover will tell you how much of your inventory you can sell within a specific timeframe, and it can be measured in years, months, or weeks. This KPI is very handy for assessing supply chain efficiency and for identifying areas for expense savings.
In the retail business, it can be pretty challenging to manage every product's stock availability all the time. Stock turnover can help you identify whether you're ordering the right amounts of goods, and how fast you're moving it. A low rate is indicating that you're not selling enough products, while a higher rate shows you that you're not stocking enough goods.
To measure this KPI first, you need two components determined: the total expenses of all the products you have sold over the given period, and the average inventory for the corresponding period. Then, simply divide the expense of goods sold by the average inventory. Higher rates indicate that you are most likely under-stocking your products and consistently running out of products, while lower rates show you that you're purchasing too much inventory and losing profit on the dead stock.
Gross Margin Return on Inventory Investment or GMROI
This retail KPI is also known as the gross margin return on inventory investment or GMROII and represents an inventory profitability evaluation ratio that analyzes a company's capacity to turn inventory into money above the cost of the stock.
To calculate your GMROI, you will need to determine the gross margin and the average inventory first. You will get your gross margin by deducting a company's cost of goods sold or COGS from its revenue and then divide the difference by its revenue. Your average inventory is calculated by summing the ending inventory within a given timeframe and then dividing the sum by the number of periods. Finally, when you have these two metrics calculated, you can determine your GMROI by dividing the gross margin by the average inventory cost.
This retail KPI is a very useful metric that will help your investors or managers to see the average value that the inventory returns above its cost. If the proportion is higher than 1, it's indicating that your company is selling products for more then what it costs the company to acquire and tells you that the business has the right balance between its sales, margin, and price of inventory. But if the ratio is below 1, everything is the opposite, and your business is failing to profit. Some leaders in the retail industry recommend the rule where GMROI needs to be 3.2 or even higher, so all occupancy and employee expenses are covered.
In the retail and every other industry in general, you need to have a precise insight into several aspects of your business to be able to assess the performance and overall health of your company. Without the right set of KPIs, you will run around in circles, not even knowing how the success looks like. With the right KPIs set according to your company's objectives, you will be able to make the right strategic decisions and take actions to avoid issues before they jeopardize your business, and therefore profit.