Are You Measuring The Right Things In Your Retail Business?
KPI’s or Key Performance Indicators are the metrics that retail owners and leaders use to measure the effectiveness of their business. Often, these formulas and numbers can be used to help evaluate whether the right activities are happening in the field, whether the inventory is producing maximum a maximum return on investment and how good a job the business is doing with regard to maintaining or retaining profits earned from sales. In today’s article we are going to look at some of those key indicators.
KPI’s Only Tell Part Of The Story
But before we do it is important to remember that the metrics that are derived from your POS reports and produced by your finance department only tell part of the story. As retail operations specialists and retail training specialists we often work with retailers who know that the KPI’s are telling them about a problem but they are unable to identify the root cause. Our first course of action is to dig-in and back-up the story told by the numbers through conducting real-world investigation, observations of on-the-floor activities, management interviews and more. Remember…the numbers are a result of people’s activities and it is those activities and behaviors that will need to be modified.
Sales compared to last year (or any other period): Sales revenue measured against a prior period from the prior year. Actual sales $ for a given period divided by actual sales $ for the comparable period
Sales compared to budget/target: Measures revenue compared to the business plan for a defined period. It is possible to create a budget that is less than last year’s revenue. Actual sales $ divided / budget/target = Sales to budget/target
Gross Margin: A measure of the percentage of profit each product or service sold contributes to the business. GM % = (Selling Price – Cost) x 100 / Selling Price
Gross Profit: The amount of raw profit that a product contributes to the business when it is sold. It is important to remember that dollars pay the bills, not margin. GM = Selling Price – Cost
Sales per Square Foot: Actual sales for a given period (usually a month or a year) divided by the total floor area (in sq.ft.) of the store. In some cases merchants will modify the metric to measure sales per square foot for particular areas or displays of a store such as wall displays and gondola fixtures
Average Sale per Customer/Transaction: Total sales $ for a given period divided by the number of customers or transactions for the same period. This is a great tool for comparing results on a per sales rep or store vs. store basis
Units per Customer/Transaction: Sometimes called lines per ticket, this measures the total number of units sold in a given period divided by the number of customers or transaction for the same period
Conversion rate: Often used as a key metric for measuring sales rep and store productivity it is the number of transactions in a given period divided by the total number of customers who entered the store during the same period. It should only be used along with the prior two metrics and sales per hour in order to get a full picture.
Sales per Hour: Used for measure sales productivity for either a store or sales or associate, It is expresses as Actual sales divided by the number of selling (or payroll) hours during the same period
Mark Up: Used either to measure the mark-up on a particular item or category. Mark Up % = (Selling Price – Cost) x 100 / Cost. For example: Mark Up % = (49.95 – 30.00) x 100 / 30.00 = 66.5%
Weeks On-hand: This is a great way to determine whether your business is over (or under) stocked on an item or category. This formula is expressed as inventory (at retail) divided by average weekly sales for a given period of time.
Gross Margin Return on Inventory Investment (GMROII): A key – and underutilized metric for retailers, GMROI measures the productivity of your biggest asset – your inventory. The higher the number the better and it can be positively impacted by increasing margin, increasing sales and/or effectively controlling weeks of supply. The formula is GMROII = GM% x (Sales / Avg. Inventory)
As noted earlier. These – and other KPIs – must be judged in conjunction with observing and inspecting the behavior and activities of your team members. Whether it is improving a sales representative’s ability to sell add-ons (to drive margin) or to convert more sales (driving revenue and profit dollars; a manager’s ability to schedule effectively (impacting payroll) or order effectively (weeks on hand); or a buyer’s ability to manage their product pipeline and markdowns (impacting margin and weeks of supply) it is these activities that will make the difference in your business. The KPIs just point you in the right direction.
Would you like to learn more about how the Retail Advocates and Retail Training Services team can help you to build your business? If so, Contact us for a free one-hour consultation!
- David Goodwin is the Principal of the Retail Advocacy Group. As a 30 year veteran of the retail industry he has operated hundreds of retail locations and launched new retail concepts and products. You can learn more about instructor-led, e-learning, and other training solutions for retailers at www.retailertrainingservices.com..