KPIs, or key performance indicators, are an essential part of running a business. These metrics allow business owners to keep track of how their business is performing. The KPIs your retail business tracks should be metrics that coordinate with your company's goals. The reason we use KPIs is to help track performance and growth and if we measure them, we can use them to help us improve our business.
We’ve highlighted 11 different indicators to understand below.
1. Foot Traffic and Digital Traffic
2. Conversion Rate
3. Average Transaction Value
4. Customer Retention
5. Inventory Turnover Rate
6. Gross Margin Return on Investment
7. Gross and Net Profit
9. Sales Compared to Cost of Goods Sold
10. Sales Per Employee
11. Sales Per Square Feet
Foot Traffic and Digital Traffic
This metric tracks the number of visitors to a retailer’s store and/or website. To track visitor traffic for brick-and-mortar stores, the sales team can use manual handheld counters or traffic can be tracked digitally with a Dor People Counter. By studying this metric, retailers can observe whether their business is catching the eye of consumers or if special promotions are working to increase the number of people who walk through the doors. For digital traffic, retailers should use tools such as Google Analytics or the analytics available on Shopify or other e-commerce platforms to track traffic to their websites.
A store’s conversion rate identifies how many of your store or website visitors become purchasing customers. It is calculated by dividing the number of transactions by the number of store or site visitors and then multiplying by 100. We recommend aiming for a conversion rate of at least 20%.
It is a good idea to compare conversion rates to see if they go up or down over a period of time and to compare how they change for different locations. Remember, it's very unlikely that your in-store conversion rate will be about the same as your e-commerce conversion rate. If after tracking this metric for a couple of months you see a downward trend, please reach out to us!
Average Transaction Value
ATV also known as AOV (Average Order Value) helps us see how much customers are spending each time they shop. The formula is total sales for the period divided by the total number of transactions for the same period.
This metric is helpful because it gives us a tangible number we can work to improve on through order upsells, improved merchandising, understanding popular products, and creating promotion strategies to raise our average transaction value. As this number goes up, generally profits do as well.
Customer retention rate enables retailers to ensure that customers you’ve had in the past are becoming repeat customers, which is extremely important because it is significantly less costly to focus on retaining old customers than acquiring new ones.
Businesses can calculate their customer retention rate by subtracting the number of new customers during the period from the total number of customers at the end of the period, dividing that number by the total number of customers at the start of the period, and then multiplying by 100. If a retailer’s customer retention rate is low, there are many ways that retailers can work to improve it. A focused effort on Clienteling and building relationships will help improve customer retention. Loyalty programs are another big way businesses improve their customer retention. We recommend using Endear CRM & Clienteling software to help raise customer retention and build strong customer relationships.
Inventory Turnover Rate
This KPI tells retailers how many times you’ve needed to restock your inventory over a given time period. Retailers can calculate this metric by dividing their cost of goods sold (COGS) by their average inventory cost for a specific period of time. This information is found on the balance sheet and income statement.
This number is extremely important because it can tell a retailer if they are ordering the proper amount of inventory. This can save a retailer money if they realize they have been ordering too much stock, and it can also save a retailer from disappointing the customers if they realize they haven’t been ordering enough inventory.
Remember, a low ratio can be a sign of weak sales and extra inventory. The higher the ratio, the better.
Gross Margin Return on Investment
GMROI is a performance indicator that calculates how much money you have made off of your inventory. This KPI is calculated by dividing gross profit by the retailer’s average inventory cost.
This information can be found on the balance sheet and income statement. Tableau explains that gross margin return on investment can tell you how many dollars you get back from every dollar you spend on your inventory. A low GMROI indicates you may need to raise your prices. Gross margin return on investment can be used to track a specific product or product category, which is great because it can tell a retailer if certain products have a good return or if they aren’t making them the money they need to continue stocking the product.
Gross and Net Profit
Gross profit is a retailer’s total revenue after the cost of goods sold but before additional expenses. It is calculated by subtracting the cost of goods sold from total revenue. This metric can help retailers see how much money they have to use for other expenses or investments.
If gross profit is low, it can show a retailer that they should try to find a way to lower the cost of their products. Net profit is the profit a retailer has made, minus every expense. This is the money that goes back to the business. If this number is low, the business can reexamine its structure and make changes to either generate more revenue or decrease expenses.
Year-over-year (YOY) growth shows a retailer if their business is growing, and it can also be tracked month-over-month (MOM). YOY growth is calculated by subtracting the previous year’s sales from the current year’s sales, dividing that number by the previous year’s sales, and multiplying by 100.
For MOM growth, the formula is the same, replacing “year” with “month”. Retailers want this number to be a positive percentage, indicating growth. When tracking this KPI on a monthly basis, retailers can identify falling sales early.
Sales Compared to the Cost of Goods Sold
This KPI is found by dividing a retailer’s sales over a selected period of time by their cost of goods for that same period. All of this information can be found on the income statement.
This KPI is a quick and easy way to check what markup the business is getting on the products being sold. Most retailers want a markup of at least 2.2 but each business is different, so this number is not set in stone. If the markup numbers are not what the retailer wants, the retailer should do a few quick checks to see why. A common reason the markup could be lower is from overuse of discounts. If this is the case, check your sales by an employee to see if someone is overusing their discount privileges. Another reason could be the retail price is too low compared to the actual cost of what the business paid for the inventory.
Sales Per Employee
This KPI helps retailers determine if the amount of employees they have on the floor is sufficient based on the number of sales the store gets. This can be calculated by dividing the retailer’s net sales by the number of employees. With this metric, employers can determine who their top performers are and use this information to influence schedules, promotions, and training. Employers can also use this information to help their employees set sales goals for themselves.
Sales Per Square Foot
For brick-and-mortar retailers, sales per square foot is a crucial metric to ensure the space is being used in the best possible way, it is especially important for retailers with multiple locations, as it allows you to compare how each one is performing given the size of the store.
Sales per square foot is calculated by dividing your store’s net sales by the square footage of the location. Some retailers will calculate sales per square inch to get an idea of the productivity of the space. Retailers can even visualize the information they get from this calculation with heat maps in which they can analyze why certain parts of the store may be performing better than others, and use that knowledge to more effectively organize and display the merchandise.
Why should retailers track these KPIs?
Now more than ever it is important for retailers to track their KPIs to ensure the health of their business so they can catch possible costly problems before they arise.
For retailers with physical stores, ensuring these KPIs are producing the metrics they want will help keep them in business. In-person shopping is especially popular post-COVID, and for the first time in years, more stores are opening than are closing in the U.S.
These KPIs are just as important for online and omnichannel retailers, as competitors are rampant in the online space. To be successful online and in-store you need to have strong numbers! Tracking KPIs are a big part of what will help retailers remain competitive.