It is said that leadership is doing the ‘right things’, whereas management is doing things ‘right.’
When it comes to the corporate world, of course, not every businessman is a born leader. But anyone can be a great manager and make their business the leader in the industry. All that is required is sufficient knowledge and data to analyze and evaluate your organizational needs so as to make informed decisions in the best interest of your business.
However, in the retail business, this is easier said than done.
From handling the transactions and keeping track of the inventory to dealing with the customers; managing a retail business is a daunting task.
Usually, retailers will judge their organizational operations based on simple profit and loss calculations. But a net profit or loss is insufficient to decide whether your business is doing well or not; you need a much more detailed framework that targets different areas within your organization and gives you a comprehensive analysis of the overall business management and performance.
There are several other metrics that are used by the top retail brands to determine how their business is performing.
These metrics, called Key Performance indicators (KPIs), are used in various industries to gauge the efficiency of a company’s operations and the profitability of their buying and selling processes.
However, every KPI is not applicable to every business. Most KPIs are specific to a certain type of industry depending on what they measure and the results that they indicate.
To make your task easy, we have gathered the 25 most important KPIs used in the retail industry. So, whether you own a brick-and-mortar retail store, an online shop or a wholesale business, you can use these KPIs to keep track of your business performance and ease your management processes.
These KPIs have been categorized according to the different aspects of a retail business that they apply to.
Category: Sales and Revenue
1.Sales per Square Foot
Sales revenue is something that every businessman is bound to measure. But simply recording the ‘total sales’ is not enough if you want to make efficient use of the available resources in order to maximize your profits.
Measuring the sales per foot is one of the best ways to analyze the performance of your brick and mortar retail store.
As the name suggests, this KPI determines how much you earn for every foot of sales space. Simply divide the total revenue that you earn from sales by the total sales space in your store (i.e., the area where customers shop around) to find the sales per square foot.
Sales per square foot = total revenue from sales / total sales space (in square foot)
This will help you determine how effective the arrangement of your store and assets is. You can also use the results to make certain decisions about the store’s layout and marketing and inventory placement. It goes without saying that this KPI should be as high as possible.
This is the most significant measure of your business’s profitability. You can calculate it as follows:
Profit margin = Gross profit / Total revenue x 100
This KPI is important because it shows how much money you are earning from the sales of goods after the costs involved have been deducted.
Every day is not the same in a retail business. You must record your daily sales and then do a comparative analysis to determine whether you will able to reach your target sales or not. If there are any low-performing days, then you can take the required marketing or advertisement decisions to boost sales so that you don’t suffer a loss.
The formula to track this metric is:
Total sales on a day (or any other time period) / total sales on the previous day (or any other similar time period)
Sales count will be indicated on your POS system. It is the number of transactions made in a given time period.
So, it’s formula is, sales count = number of transaction at a given sales booth
This KPI can tell you the busiest shopping hours so that you can post the sales team accordingly. If your store is very large and has numerous check-out counters, then this data can also tell which retail booth was the busiest of all. You can then allocate that booth to the most efficient worker.
5.Cash Conversion Cycle (CCC)
Cash conversion cycle is a measure of the amount of time it takes for the money invested into your business (in the form of stock purchases, etc.) to come back to you in the form of revenue earned.
The lesser the time between buying goods and generating money from the resale of those goods, the more efficient your retail business is.
The formula to track this KPI is as follows:
CCC = DIO + DSO – DPO
Here, DIO stands for Days Inventory Outstanding,
DSO stands for Days Sales Outstanding, and
DPO stands for Days Payable Outstanding
Category: Customer Behavior
Foot traffic means the number of shoppers who visit your store in a given period of time.
This is usually measured via counters, but you can also use other methods such as heat sensors, video surveillance or even mobile tracking technology.
This KPI will give you great insight into your marketing and advertising techniques, your store’s layout as well as your staff management. Knowing which areas get the most customers and during what time can help you allocate your best sales staff accordingly.
Foot traffic = number of people visiting the store on a given day
This KPI indicates your store capability to turn visitors into customers.
To find the conversion rate for your business, divide the number of sales by the gross traffic.
That is, conversion rate = total number of sales / total traffic of visitors
For instance, if 10 people visit your store on a certain day and only one of them makes a purchase, then your conversion rate is 10%.
For online stores, this is calculated by your ability to translate inquiries, sales call and website views into actual transactions.
A low conversion rate means that you have potential customers but your business lacks in customer service, merchandising, shopper experience or the likes.
8.Average Transaction Value / Basket Value
Average transaction value tells you the average amount that a customer usually spends in your store.
Average basket value = total revenue from sales / total number of transactions For a wholesale business especially, this indicator should be as high as possible as it means customers are buying in bulk and/or they are buying more expensive items from your store.
As is evident by the name, product returns is a KPI that denotes the number of goods that were returned back by the customers.
Product returns = number of items returned / total items sold x 100
Keeping track of this metric helps you know if there are issues in the customer service or the quality of merchandise.
10.Customer Retention Rate
Customer retention rate (CRR) is exactly what is apparent by its name.
This Key Performance Indicator depicts your loyal customer base. Shoppers who keep coming back for more and prefer your brand over others are the regular customers who are highly valuable for your business.
You must use this KPI before running any marketing campaigns.
CRR can be calculated as follows:
CRR = ((E – N) / S) x 100
Here, E denotes the number of customer at the end of a period
N denotes the number of new customers acquired during that period and
S denotes the number of customers at the start of that period.
Category: Inventory Management
Stock is to retail businesses as air is to humans.
But managing stock is not a joke. A hassle-free inventory management requires that you always measure stock turn.
Stock turn, also called inventory turnover, is the number of times your stock/ inventory is sold through or used completely in a given period of time. It is directly related to the number of sales and can help you make critical inventory decisions on time.
To track this KPI, use the formula:
Stock turn = sales / average inventory
This metric measures the number of units sold versus the quantity of that product that was available for sale.
That is, sell-through percentage = number of items sold / total quantity of the item at the start of a given period x 100
Based on this KPI, you can decide which items should be put on sale, which items should be re-ordered and which items should be returned to the vendor.
13.Inventory Carrying Costs
The inventory carrying costs includes all the costs associated with holding stocks. For instance, warehousing costs like rent, utilities, salaries, and financial costs related to perishable items, shrinkage and insurance are included in inventory carrying costs.
So, inventory carrying costs = warehousing costs + stock handling costs + cost of deterioration and obsolescence and so on.These would vary depending on your business’s needs, but you must keep a close watch so that they don’t exceed a certain range.
Category: Internal Processes
14.Capacity Utilization Rate (CUR)
The capacity utilization rate is a measure of how effective the business is in fulfilling the work required using the resources available.
CUR is expressed as a percentage and should be close to 100% as this would mean that the staff allocation and workload distribution are justified.
CUR = business’s actual output per year / business’s maximum output per year x 100
15.Order Fulfillment Cycle Time
Order fulfillment cycle time is highly important for online retail stores as it shows how efficient you are when it comes to delivering the goods on time.
A key reason why many people prefer to shop online is because it is convenient. So, if you take a very long time to deliver the products, then your customers are unlikely to visit your online store the next time.
For regular retail stores, this means that your check-out counters should be fast and efficient and customers shouldn’t have to stand in long queues to pay for their purchased items.
Order fulfillment cycle time = total time between customer authorization of a sales order and the customer receipt of product.
16.Process Downtime Level
Process downtime level indicates the amount of time wasted due to technical breakdowns, staff sickness, and inventory restocks.
Process downtime level = time wasted due to power outage + staff absenteeism + technical breakdown and so on.
Shelves that are not stocked with the goods and products before a customer walks in, staff absenteeism or any error in the POS system means that customers face hindrance and store operations are affected.
17.Customer Profitability Score
The customer profitability score is like a more detailed and advanced version of the ‘cost of customer acquisition’ KPI. This KPI tells you about the profit an individual customer brings to your business after various factors have been accounted for.
This includes the costs incurred in attracting, acquiring and then keeping the customers happy by applying the required marketing strategies and providing appropriate customer care services.
Customer Profitability Score = revenues earned from a customer in a given period - cost of supporting the customer in the same period.
Category: Staff Management
18.Employee Turnover Rate
Whether you are new to the retail industry or have been running a retail store for many years now, you would know that the sector is quite notorious when it comes to managing employees.
Most of the employees in a retail store are usually youngsters who are working part-time jobs. A high staff turnover rate means that your business suffers from downtime and extra costs incurred in hiring and training new workers.
To increase your employee retention rate, offer your workers handsome wages and other benefits that encourage them to stay. This may increase costs temporarily but will benefit you in the long-run.
This KPI can be measure by giving employees a questionnaire.
Employees score answers to questions with 1 – 5 where 1 the score for ‘strongly disagree’ and 5 is for ‘strongly agree.’ Then, employee turnover rate = total point score / total questions x 100
19.Hours Worked Vs. Hours Scheduled
This metric is measure by the formula,
Hours worked by an employee / total hours scheduled for that employee.
Track the numbers of hours your employees work so that you can pay them accordingly. This helps you save the money wasted in over-payments and also ensures that employees who work overtime are given their due share. Also, this means better workplace satisfaction, which will also reduce your staff turnover.
20.Labor Cost as a Percentage of Sales
This KPI is calculated by the formula,
Labor cost = costs of labor wages / total revenue x 100
It is essential for any retail business as it helps you to match staffing levels to customer demand.
21.Human Capital Value Added (HCVA)
The HCVA is a measure of the financial value added to your business by individual staff members.
For a retail business, the salesperson plays a very important role in terms of customer satisfaction and the overall shopping experience for the customer. It is essential to have helpful, friendly and engaging salespeople to guide the customers in your store and to answer their queries should the need arise.
The HCVA enables you to track your best-performing sales staff that helps increase sales and customer retention rate.
It can be calculated as follows:
HCVA = (Revenue - (Total Costs - Employment Cost))/ FTE
Here, total costs = revenue - profit before taxes
employment costs = pay + benefits
FTE = average number of full-time employees (or full-time equivalents)
Category: Quality Assurance
The pre-requisite of customer satisfaction is to sell quality products.
Not only should the quality be as per the customers’ expectations, but your business must also follow the rules and regulations set out by the relevant authorities if you want to rank above others in the industry.
It is measured by taking customer feedback on appropriate key factors scored on a scale from 1 to 10. The final figure is usually expressed as a percentage.
23.Net Promoter Score
he net promoter score speaks volumes about your brand image. It is an indicator of your store’s reputation as it shows how likely it is for a current customer to recommend your store to their friends, family or anyone else.
This can be determined from customer reviews or by asking every new customer how they got to know about your store.
24.It goes without saying that the net promoter score should always be high.Market Share
The retail industry is highly competitive. Being satisfied with a large number of sale transactions can throw you off the track when you least expect it. You must compare your total sales with that of the entire market.
Knowing your relative market share will help you evaluate your status in the retail industry and take the required steps to ensure that you stay ahead of your competitors.
Market share is calculated by the formula:
Company’s sales over a time period / the total sales of the industry over the same period.
25.Cost of Customer Acquisition
With so many retail businesses now in the market, it goes without saying that you spend some amount on promoting your brand. But you must compare the cost incurred in acquiring a customer with the amount they are expected to spend.
If you spend $500 to attract a customer who is projected to purchase goods worth $50, then you need to rethink your marketing strategies.
Customer acquisition cost is measured by the following formula:
Marketing expenses / number of customers acquired in the period this money was spent.
So, these were the most important KPIs used in the retail and wholesale businesses.
Use these indicators to analyze and evaluate your business operations, find if there are any loopholes in the processes and hence, determine the correct course of action to make your retail brand succeed and flourish.
After all, measuring the right metrics to manage your business is the key to a retail business done right!