When working with retailers, a common question I get asked is “How do I know if my business is doing well, and what should I be looking at?” It’s a great question and one that I find many business owners struggle with and generally don’t know where to look to find the answer. In my experience, there isn’t one overall metric that will truly answer the question. Rather, I believe one must look at a set of metrics to fully measure operational performance. In addition, providing metrics is one thing but knowing what actions or strategies to employ in order to impact a particular metric is another. Tracking retail metrics is essential to improving store productivity and efficiency and simply making the best use of your time and resources. To help your retail organization measure and understand performance, the DHW Retail Team offers the following metrics that we generally recommend owners include on their “dashboard” to measure their success.
Sales Per Square Foot – This is a common metric that has been around for many years and simply measures how well you’re doing relative to the fixed costs for lease and occupancy costs. This KPI is calculated by dividing sales by the store’s total square feet of sales space and can be used to measure and compare store performance, inform merchandising decisions, and identify trends over time. In short, sales per square foot helps retailers understand if they have the right product at the right place and at the right price.
A “good” sales per square foot metric will vary across the retail industry. A retailer selling high-value goods at smaller stores will obviously have a higher metric than larger stores selling less-value goods. As such, we recommend comparing your store’s sales per square foot against your direct competitors in comparable or similar retail categories to obtain a more accurate measure of performance.
There are several strategies that retailers can employ to increase sales per square foot. Increasing the basket size by training staff and using Apps to upsell and cross-sell more effectively can make a major impact in improving sales. Improving store layout by optimizing spaces that look crowded, tidying up end caps, and by moving fixtures and signage around to reduce friction to allow a smooth flow of in-store traffic. Loyalty programs are a great way to get your customers to shop more at your store and entice repeat purchases, both of which increase the odds of improving sales. Optimizing product assortment by strategically displaying the products that sell the most, and not wasting space on those that are not selling, can solidify sales and cash flow. Retailers should pay attention to sales and inventory reports for a particular period of time as they will help identify the products that are selling faster than others.
Gross Margin Return on Investment (GMROI) – Gross Margin Return on Investment measures what you are generating from the items you’re offering for sale, how well you’re offering them, and the cost of goods relative to those items. In short, GMROI measures the amount returned on every dollar invested in inventory and thus, can be used to improve inventory management or improve buying decisions by comparing different SKUs, departments, or product categories. For instance, if GMROI = $5, it means that for every dollar invested in inventory, the return is $5. GMROI can be calculated by dividing gross profit in dollars by the average inventory at cost in dollars.
GMROI can be improved by improving gross profit. Retailers should consider strategies designed to optimize prices to obtain the most out of every product and by taking a close look at how low to go on markdown levels. Retailers can also negotiate with suppliers on the cost side to ensure they are getting the best pricing and deals in connection with their purchasing functions. Retailers can also impact GMROI by reducing their average inventory and by increasing and improving turnover rates which involves understanding what is selling, how it’s selling, and what can keep it selling. Once again, performing a consistent and frequent review of inventory reports will assist retailers with buying decisions to help prevent the negative impacts that excess inventory can bring.
Average Transaction Value (ATV)– Average Transaction Value is calculated by dividing sales by the number of transactions for a certain period. This metric helps retailers better understand how their customers interact with their product assortment, which products sell well, and which items are typically bought together. It can also be used to measure how well their in-store displays are making the desired impact.
ATV can be improved by training your workforce with upselling and cross-selling training and techniques that empower them to drive sales. Focusing on understanding each consumer will help your staff better understand which upgrades and add-ons to recommend. Supplement your store associates by displaying complimentary items throughout the store and by stocking related items within close proximity to help increase the chances of customers bundling items together. To entice your store associates to embrace this mindset, various contests and incentive programs can be implemented that are designed to reward the intended performance.
Promotions and product bundling are proven strategies designed to get consumers to buy more. Making sure customers are aware of various promotions and packaging complimentary products together could convince your customer to leave with multiple products instead of just one. Again, retailers should make sure their staff are aware of these promotions and know how to communicate them to customers by providing ongoing training on the latest offers and bundles.
Strong loyalty programs that reward frequent and repeat purchases can also improve the basket size, and of course, point-of-purchase displays are incredibly effective at enticing impulse buys, as your consumer views the item and develops an emotional response as they stand in line. For retailers who utilize online shopping, consider including options to add on when the customer is checking out.
Conversion Rate – Conversion Rate measures the frequency of those who visit the store and actually buy something and is one of the most important KPIs for telling retailers how successful their store is. Conversion rate is calculated by dividing the number of people who purchase by your overall foot traffic and multiplying by 100. On average, the conversion rate for brick-and-mortar stores is approximately 20%-40%. Online conversion rates tend to be lower since it’s easier for consumers to window shop and can start and finish their shopping experience in a matter of seconds. In-store shoppers, however, have a more hands-on experience as they can interact with store associates, touch, and see products. As such, they are more likely to purchase and spend more during their shopping session.
To improve conversion rate, retailers should consider a couple of strategies. Out-of-stocks can be the kiss of death for any retailer. Not only do retailers lose out on the sale, but customers can get frustrated and use various social networks to communicate their displeasure with others. As such, consider offering buy- in-store, ship-to-customer order fulfillment. With this capability, retailers can complete sales in the store and fulfill orders from a warehouse or another store location that has inventory. Retailers are no longer limited to selling only what a particular store has in stock. In addition, training, motivating, and incentivizing store associates to assist customers and provide exemplary customer service always helps, and of course, free samples to highlight new, improved, or complementary products are proven tactics to increase the conversion rate as well.
Summary
There are numerous other metrics available to retailers. However, our DHW Retail Team believes that the aforementioned KPIs are the most critical and should be incorporated into any retail dashboard. Retailers collect a vast amount of data from customers and transactions, and digital has given us a new channel to measure. As such, we feel that those retailers who embrace data, understand it, and can capitalize on it are those that will realize the most success currently and in the future. To learn more about retail KPIs and how they can impact your retail organization, please contact Tim Reynolds at 828.322.2070 or tim@dhw.cpa.