While it is good to trust your instincts, it is best to include facts and statistics for a great business. This article will help you get an insight into the details of the Retail sector and the 9 important KPIs associated with it.
- This article outlines the most important retail metrics and KPIs in the retail industry.
- You'll discover how to measure different metrics using formulas.
- Learn about SMART criteria for KPIs
- You'll also learn about stats, the need, and the importance of KPIs.
Emergence of Retail Sector and KPIs
Retail is the mechanism of making a profit by selling consumer products or services to consumers across various channels of distribution. Retailers work on meeting the demand that has been identified by a supply chain. The word "retailer" refers to a service provider that fills small orders from a large number of end-users.
The retail sector heavily relies on certain figures and statistics to evaluate if it has been on the right path for accomplishing its objectives. If you are enduring trying times in your business, it would be wise to take a quick look at what's going on in your company. The retail metrics and KPIs are the factors that would present the actual picture of the status of the company.
In such circumstances, a comprehensive examination of crucial variables such as stocks, sales, and consumer data can help decide the course of action.
What are KPIs in Retail?
KPI or the Key Performance Indicators are values or figures that tell us about the health of a business in context to the achievement of goals. These values could be anything connected to your business such as
- defining the number of sales
- total revenue or
- even the number of customers.
Being the most critical metrics in your business, KPIs present you with numbers and information that can define the direction of your company. When planned well, KPIs could drastically enhance the overall performance of the enterprise.
Organizations use KPIs at various levels to assess their progress toward their goals. While some companies use them to focus on processes in various departments, others may use KPIs to focus on the overall efficiency of the company.
As every retail company is different, the emphasis of the different metrics may vary. You may want to know more about the metrics that pertain to your business and those to which you need to pay attention.
In case of uncertainties about KPIs, we've curated a list of the most important retail metrics you would want to keep tabs on.
Why do you need KPIs?
The KPIs that a company designs are fundamentally based on the industry it belongs to. Now that we have an idea about what KPIs are, let’s gauge why do we need them.
- To analyze patterns over a period of time: You can start with detecting patterns in your numbers by measuring the same KPIs between quarters. These patterns can be extremely helpful in numerous ways. You can assess these KPIs by comparing performance in quarters, years, or even weekly and daily.
For instance, you can perhaps see that you have some team members who consistently fail or some who exceed on their KPIs. You may then utilize this data to communicate the respective consequences to them.
- To measure progress: You can keep a track of various aspects or key indicators including the company’s income, number of employees, and locations apart from the gross margins. By setting targets at the onset of each year, you can conveniently use the right KPIs to measure the overall progress.
- To monitor the financial fitness of the organization: Setting the right KPIs is the key to achieving a healthy financial report. KPIs denote how the company performs in the primary areas. In most cases, only a few KPIs are required for the purpose. Based on the segment of your business, you may decide which parameter you should focus on. It could be any, including Revenue, Customers, or Employees.
- To make adjustments and accelerate on the track: Apart from the list of KPIs you have designed for your business, Leading Indicators are also a vital aspect. These are also KPIs but they guide you towards the desired conclusion. There are two primary characteristics of leading indicators: they are measurable and you can control them immediately. They help you make the necessary adjustments and pick up speed while being on the correct path.
- To resolve issues: You can use a combination of KPIs to keep the right information handy. For example, you may be wanting to launch a new product. In such a case, you may test waters with a few clients, work around with KPIs and see if the model is sustainable. If you find issues, you will still have time to resolve them before you finally launch your product for the markets.
Top 3 Reasons KPIs are Important in Retail
KPIs can be specifically important in the retail sector when it comes to overseeing warehouse operations, managing the inventory, tracking orders among others. The KPIs reveal these essential parameters and also indicate if the company is adeptly meeting its targets.
So, KPIs will certainly make life much easier apart from identifying the loopholes and leveraging the robustness of the organization.
Here’s a list to portray the importance of KPIs:
- Measuring Targets: KPIs let you know your position with respect to achieving your goals. How far or close you are to accomplishing your objectives.
- Fetches Stats: You may observe an employee performing below average but do not have enough information to support your stance. Setting a KPI to gauge performance would help. KPIs will present to you the stats and figures, apart from aligning goals for your employees.
- Use KPIs to Persuade and Inspire: Your employees being an integral part of your business, need your approvals and appreciation. This is important as their productivity eventually affects the performance of the company. It’s good to have KPIs that help you assess your employees’ competence. You can use this information to help them perform better, be proactive and be well-equipped for challenges.
How to define your KPIs? - The SMART factor
Now that we are familiar with the term, let’s move ahead to know about evaluating KPIs. Organizations adopt war-footing measures to define KPIs that are aligned with their business. However, there is a need to evaluate the efficacy of KPI. For this purpose, we could use the SMART criteria.
You can read more about KPIs, the SMART factor and their importance here.
So far in the article, we have seen what is retail sector and its relationship with the KPIs, besides the importance of metrics alongside KPIs. The next sections are where we delve into details and we will cover:
- 9 Most important KPIs that the new-age retailers need to know
- Descriptions and importance of these 9 KPIs
- The formula for the 9 Retail KPIs
- Benchmarks for the Retail KPIs
- Some examples for a clearer understanding
9 Important Retail KPIs
Being acquainted with numerous key indicators, you need to figure out the ones that best suit your retail business. There might be some KPIs that outweigh others. We bring to you the 9 most popular KPIs that retailers monitor to stay ahead in the competition.
- Sales Per Square Foot
- Sales Per Employee
- Conversion Rate
- Gross and Net Profit
- Average Transaction Value
- GMROI (Gross Margin Return on Investment)
- Year Over Year Growth
- Stock Turn or Inventory Turnover
- Customer Retention
Now that you have added the KPIs to your dashboard, it is time to lay your hands on ways to calculate them. In this section, get to know the individual KPIs, their importance, benchmarks. In case your business doesn’t seem to perform well, we shall also see the remedies for the problem.
1. Sales Per Square Foot
This metric gets you the number of sales generated per square foot of the available sales space of your store. Sales Per Square Foot is one of the top ways to assess the productivity of your retail showroom.
Importance: You can consider the numbers derived here to plan the layout of your store and for maximizing the usage of the space within. It is also a good way to measure how your business fairs in comparison to others. You will also learn about the costs incurred to maintain the premises against the revenue generated.
Here’s the equation to calculate it.
Sales per Sq Ft = net sales/ amount of sales space
Benchmark for this KPI depends on many factors such as location. Also, most independent retailers are not comfortable sharing much information in this regard. However, if we consider the retailers in malls, their sales per square foot come to around $300. Some could easily overstep this amount. For example, Apple stores are way into the thousands.
Ways to Improve Sales Per Square Foot:
- Increase the transaction value
- Enhancing the ambiance of the store
- Have a splendid collection of products
- Deploy a well-trained staff
- Consider offering lucrative promotions and discounts
- Make customer engagement interesting so that people spend more time in the store
Let’s say, your apparel store has garnered a great number here, i.e. in Sales Per Square Foot. This is indicative of many factors such as affordability of products, a reachable location, impressive merchandise display, to name a few. A store that makes $100 will undoubtedly be termed as a better business than the one that fetches $60. Higher Sales Per Square Foot, the healthier the business.
As of August 2020, average sales per square foot in some of the retail sectors are as mentioned:
Specialty retail: $325
2. Sales Per Employee
This is another remarkable metric to monitor the revenue generated by the individual staff members or employees. This makes for a good insight as far as smart employment decisions are concerned. It also assists you with planning employee hiring, compensation, and also their shifts.
Importance: By creating reports based on this KPI and its formula, you can easily know who are the dedicated members of your staff. This would help you contemplate wise investing in employee training or other perks for the deserving staff members.
Sales per employee = net sales/ number of employees
Employee headcount and total revenue are two components that you should watch out for.
Ways to Improve Sales Per Employee:
- Invest in a comprehensive training program for the employees
- Setting the right and practical goals for all employees
- Motivating them to do better
Assume that recently you witnessed your sales dive at one particular level of your store. At this point, it would be wise to consider if you have too many employees deployed on the same floor. Contemplate scattering them to diverse areas of the gallery for a better result.
3. Conversion Rate
This metric helps us with the ratio of the total visits to actual purchases by the visitors. It brings forth the importance of converting rather than only focusing on driving a good amount of footfall.
Importance: Conversion Rate is crucial as it determines your sales directly. Conversion refers to the actions you would like the customer to take such as signing up for a promotion, purchasing products, or registering for a card. A customer making a purchase or registering with your brand is a conversion. This element will help you examine if at all you are earning loyal customers among your visitors.
Conversion Rate = number of sales/total number of visitors
Conversion rate is termed as a highly subjective entity. With multiple variables affecting it, the average conversion rate for retailers could be a range as wide as 20 to 40%. However, if the rate dives down to 15%, then it calls for introspection and corrective measures.
Ways to Improve Conversion Rate:
- Enhance customer relationship through trained employees
- Being persuasive but not clingy
- Provide a piece of all-inclusive and sweeping information and insights about products
If you have observed an unremarkable conversion rate, one of the ways you can improve it is by enhancing the user experience; on the website or in-store. In the case of the online store, you may want to add pop-ups that are more descriptive and provide adequate information. This enables a better user experience without having to wait for too long. Happier the customer, the higher the chances of conversion.
In the case of a retail outlet, you may want to keep the customers entertained and occupied by making the product display more appealing.
4. Gross and Net Profit
The Gross Profit is the amount you finally made after subtracting the cost of producing and selling your product. The Net Profit is the amount you make after deducting the costs incurred while carrying out all the other related tasks, such as admin expenses.
Importance: These present extremely important figures as they indicate if at all you are making money in your business. After all the hard work, sales and marketing, investing time in strategies like customer relationships, you need to know if there has actually been any profit. These KPIs will lead you to agile decisions and help you lower your expenditure, in case you stand on the lower side of the profit.
The following formulas will give away the numbers:
Gross Profit = sales revenue-cost of sold goods
Net Profit = all revenues-all expenses
The miscellaneous retail recorded 31.8 % in 2020. It is noted that e-commerce or web-based retailers have a better margin than their brick-and-mortar counterparts.
Ways to Improve Gross and Net Profit:
- Increase prices
- Strategize customer loyalty programs
- Implementing meaningful and conclusive procurement practices
- Enhance the average order amount
- Devise strategies to iron out operations and reduce expenses
- Emphasize maintaining good relationships with the supplier or vendor
To make the difference between the two clearer, consider this instance. If you want to augment your gross profit, then you would need to explore options for procuring goods from a comparatively low-cost supplier. If the numbers of your net profit are uninspiring, then remodeling infrastructure or reassess staffing options to cut the expenditure.
5. Average Transaction Value
This metric helps you recognize the average amount that the customers spend in your showroom.
Importance: When you know how much the customers are spending, you know if you have to revamp your pricing. If the value denotes a higher number, then all’s well; but if it is on the lower side then you may want to shuffle up some tactics to make the visitors spend more.
Avg Transaction Value = total revenue/ number of transactions
The retail benchmark report depicted a figure of $54.14 for the year 2020, which is marginally better than it was in 2019.
Ways to Improve Average Transaction Value:
- Work on your product placement
- Be attentive to the layout of your gallery
- Ensure the sales staff is sufficiently trained
Say your generated average value is notably great; then this expresses that either the customers are buying in larger volumes or they are purchasing expensive products. On the other hand, a lower average value will need you to adopt tactics to enhance sales. These could include serving offers that encourage people to spend, implement cross-selling through subservient sales personnel.
6. GMROI (Gross Margin Return On Investment)
This metric signifies if you have had any significant gains against the money invested in your inventory. This is the best way to determine which products you should store in the inventory and which ones need to make their way out.
Importance: When you make an investment in your inventory by stocking up with various products, you would certainly wish to know if these products are worth investing in. GMROI gives you these figures which help assess if it’s a good idea to keep the existing stock.
Gross Margin ROI = gross profit/ average inventory
Although you may observe a GMROI of about $1 which indicates a profit but is that enough? Benchmarks vary from one industry to the other. However, we may consider a common benchmark of about $2-$4 to be decent enough.
Ways to Improve GMROI:
- Reducing the costs incurred on procuring goods
- Revamp profit margins
- Consider increasing prices
To understand this with an example, let’s assume a company’s gross profit for the year is $300,000 and the average inventory value is $250,000, then its GMROI is 1.2.
This means that they are making $1.2 for every dollar that they invested in the inventory.
7. Year Over Year Growth
This metric helps you to know if you have progressed this year in comparison to the previous one. You need to have a parameter that depicts your growth from the past year’s performance. This will lead you to make changes to the areas in which the performance hasn’t been up to the mark.
Importance: Growth rates depend on various ingredients. Fundamentally, it suggests if you have a sustainable business model in place. It evaluates if the company is slated to grow in the future and by how much. It is a crucial metric to evaluate the projected growth of the enterprise.
You have done a lot of hard work to achieve sustained growth for generating better revenue. Have your efforts paid off in the current year? To know this, calculate YOY using this formula:
YOY Growth% = ((current period revenue - prior period revenue)/ prior period revenue) x 100
15% to 45% is considered as a general benchmark for YOY Growth.
Ways to Improve YOY Growth:
- Identify the reason for a downward graph
- Close the gaps identified
- Take clues from competitors
- Keeping close watch on the latest trends in the market
If your company has made a profit of $300,000 for the year 2019 and a profit of $350,000 for the year 2020, then how much YOY growth has it reported?
After applying the formula: (350,000 / 300,000) - 1 x 100 = 16.67
This concludes that the organization has made a profit of 16.67%
8. Stock Turn or Inventory Turnover
This KPI represents how many sales have you done as a retailer throughout the year or for a given period of time. You work all through the year to ensure steady sales and profit. However, there might be seasonal periods of highs and lows. In case you face the lows, you will need to calculate the loss and take action in the direction to treat the issue accordingly.
Importance: It is important to know about this aspect in order to optimize ordering procedures. Neither would you want your stocks to dry up before time, nor would you want to keep them stocked for too long.
Inventory turnover = cost of goods sold / average inventory
Retail stock turn benchmark has 2 to 4 as a happy state.
Ways to Improve Stock Turn:
- Check and prevent over-ordering goods
- Take steps to see off the slow-moving or old merchandise that has ben in the inventory for a long time, before its too late.
Any number between 5 and 10 indicates a healthy stock turn ration for most industries. It represents the fact that you have just the right balance between having enough stocks and the need to reorder.
Let’s assume a garment store made $400,000 through the year, with an average inventory of $200,000.
Using the formula to calculate Stock turn:
400,000 / 200,000 = 2
This means the store had to order their inventory twice in that year; which is indicative of a profit.
9. Customer Retention
You have toiled hard to impress and attract your customers. Wouldn’t it be good to know if you have been successful in this endeavor! Here’s the formula to unlock the numbers. It is important to know this as it tells if you have ‘returning’ customers to your shop. This, in turn, is a good sign for your retail business.
Importance: You must know how your product is performing, how is your overall customer service and if you have earned loyal customers. These critical elements could potentially accelerate your business, as better the customer retention better the prospects of the business.
Customer Retention Rate = ((CE-CN) / CS) x 100
CE = number of customers at the end of the given period of time
CN = Number of newly acquired customers
CS = Number of customers in the beginning of the given time period
The retail industry achieves a rate of nearly 63%, which is low but there are reasons like massive competition and difficulty to switch which result in a low rate.
Ways to Improve Customer Retention:
- Identifying and offering personalized propositions
- Keeping a track of purchases
- Focus on customer relationship and customer satisfaction
- Encourage customers to sign up for well-thought loyalty programs to ensure returning of customers
We can take, for instance, if you follow up with a call after the purchase, your customer is likely to understand that you have taken time to assess their experience. Such a customer is very likely to return in the future. Also, who doesn’t like special offers? Present your customers with a winning deal or discounts to encourage them to come back.
To sum up the information in this article, we saw that with data-driven culture revolutionizing the retail sector, monitoring retail analytics and KPIs has become inevitable. Here are some key takeaways:
- KPIs tell you if you have met your goals.
- Through meticulous research, KPIs can help set focused targets for augmenting performance. We have also learned the formulas to calculate various KPIs and measures to overcome any discrepancies if observed.
- Finally, knowing metrics is just the first step. You will have to take conclusive steps in order to move progressively.
This piece aims at presenting an exhaustive image of the important KPIs, their importance, and how they could aid in yielding great revenue for your retail business at the end of the day.
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