It can be easy to tell whether or not your retail business is thriving, based on the amount of customer traffic and profit margins you see on a daily basis, but when it becomes less obvious, will you be able to keep up?
Most retail businesses are operating on small margins, and don’t have the time, money, or knowledge of how to measure retail performance. How can you find out where your retail business is succeeding, and where it needs to be more productive?
The answer? In most cases, you can’t. Sure, when you’re doing great, you know it. You may not be able to quantify just how well your store is performing, but you know that you’re successful because you have lots of customers and revenues are going up. But what happens when business slows down? Using key performance indicators (KPIs), aka retail sales performance metrics, is the only way to keep a close eye on the performance and productivity of your business.
First: Where Are You Struggling?
Changing your performance measurement model starts with a look inward at what you’re doing currently to measure retail performance. How can you boost your strategy to encompass more KPIs and a better, more efficient system?
Maybe you still measure performance manually, which is fine if it works for you. Many business owners still use paper or spreadsheets to manage their budget, inventory, and store performance, but there are a few issues with this method.
The potential for human error is much higher when you’re relying on a time-strapped store owner or sales manager to correctly enter data in a timely fashion.
It can take an unrealistic amount of time to calculate the critical business metrics over time that provide you with a picture of your store’s overall performance.
On the other hand, maybe you have a modern iPad POS system to automatically calculate your data, but you’re not sure which metrics to track. You can have all the tools and technology in the world, but if you don’t know how to use the data to best measure your store’s performance, then you’re not using it to its full capacity.
How to Use KPIs
Measuring KPIs won’t magically give you answers about performance unless you have something to compare it to. You need to set benchmarks and build context around what it takes for your business to be successful.
If you’re just starting a business and don’t have historical data to use as benchmarks, one way you can find this information is to join a local or state retailers group in your corner of the world. Many retail sectors have a state retail association that releases reports on the state of their industry, including benchmark KPIs, giving you something to compare your performance to year over year.
If you have one location already and are thinking about opening up a second store in another neighborhood, try opening a pop-up shop first and compare KPIs from your first location to the potential second store. Your pop-up sales should give you a good idea of whether or not an additional store location will be viable in that market.
What Are the Most Important Metrics?
The first step to measuring retail performance and productivity is to cut through the noise and find the retail math formulas that will best benefit your business. No one wants to waste time calculating metrics that don’t help them as much as others. Here are some KPIs that will have the most significant impact on your ability to track performance.
Sales Growth Rate
For those that have been in business for some time, you have the luxury of reviewing historical sales reports and comparing sales month over month or year over year to see how much your business has grown during that time.
For instance, let’s say you want to calculate your sales growth from 2016 to 2017. Your net sales were $100,000 in 2016 and $125,000 in 2017. The formula will look like this:
$125,000 – $100,000 = $25,000
$25,000 / $100,000 = 2.5 x 100 = 25%
Sales growth is measured over a specific amount of time and can offer insights about sales performance across the entire company, one store, or even one product.
To find out which of your products customers are most responsive to, use the same formula with data from a sales by product report, then divide specific category or item’s sales by the store’s net sales over the same period, and compare the data between different products.
Ideally, comparing your sales against industry benchmarks should tell you whether you need to increase sales and fine-tune your sales team.
Sales per Square Foot
Measuring sales by square footage is another good indicator of business performance and if you’re maximizing your selling space. To measure sales by square footage, take your net sales and divide by the square footage of your retail space, which would look something like this:
$125,000 / 1,200 sq.ft. = $104.16 per square foot.
If this number seems low, take a close look at the layout of your store and see how you can maximize space by rearranging your store and decluttering. You can take it a step further and create a marketing campaign around your mini remodel to help entice sales. Once implemented, recalculate this measurement to see if your efforts paid off.
Sales per Employee
Knowing how your employees are performing is another important metric to measure. Who are your top performers and who are the slackers? Understanding how employees contribute to the success of your business and how they compare to one another will help you with scheduling and hiring decisions.
For instance, during peak hours you’ll want to schedule your highest performing employees whenever possible. And when it comes to hiring a someone new, are you going to take a referral from your top performing employee or the slacker?
With a POS system like ShopKeep, you can quickly pull up a sales by employee report to find out sales count, sales amount, average items per transaction, and much more.
Your profit margins on individual products all contribute to your overall gross margin. Your company’s gross margin represents the percentage of each dollar of revenue your business retains as profit. The higher the percentage, the more your business keeps on each dollar of sales.
Let’s say you want to know what your gross margin was for the previous year. You would take your total sales for that period and subtract the Cost of Goods Sold (COGS) for the same period. Then, you need to convert that into a percentage by dividing the difference by total sales and multiplying by 100. The formula will look something like this:
$125,000 (total sales) – $50,000 (COGS) = $75,000
$75,000 / $125,000 = 0.6 x 100 = 60 percent
Using a POS system like ShopKeep, you can pull up a sales by item report for a specified date range to see sales totals, COGS, and gross margin in one easy to read view.
Inventory Turnover Ratio Stock Turn
Also known as inventory turnover or stock turn, inventory turnover ratio is a measurement of how quickly your inventory is selling over a period. To calculate stock turn, take your COGS and divide by the average inventory value for the timeframe you want to measure. The formula will look something like this:
$50,000 (COGS) / $125,000 (average inventory value) = 0.4
Therefore, in the timeframe you’re measuring, inventory is turning over four times during that period.
If your POS system doesn’t have an inventory value report like ShopKeep, where you can pull up this information with a few clicks, to find your average inventory value you’ll have to take your beginning inventory value plus your ending inventory value and divide by two to find the average.
You can also separate inventory of different product categories to identify which products have better or worse turnover rates.
Building on gross margin and inventory turnover is a metric called Gross Margin Return On Investment (GMROI), which paints a more detailed picture of your store’s profitability in comparison with inventory turnover.
GMROI is a response to retailers putting too much emphasis on sales numbers. Often, gross sales will fluctuate based on market trends. Although sales are used in many other KPIs, gross sales alone aren’t considered one of the most important retail metrics.
GMROI is a number that tells you how profitable your inventory is more holistically. To calculate this metric, take your gross margin and divide by your average inventory cost. The formula will look something like this:
$75,000 (gross margin) / $55,000 (average inventory cost) = 1.36
General rules of thumb are if your GMROI is less than one, your inventory is losing money. If your GMROI is an even one, you’re breaking even. Lastly, if your GMROI is greater than one, your inventory is profitable.
There are more metrics like sell-through rate, accessory percentage, weeks of supply and more that provide detailed insights about supply chain performance and more, and you should do your research to see which KPIs fit best with your business model. Also, if your retail store has an eCommerce feature, you’ll need a more specialized set of performance metrics.
The Problem and the Solution
Now you know how to measure retail performance, but is it feasible? Can you handle the time expenditure associated with figuring all this out? The answer is that it truly is necessary to assess the health of your retail store. If you don’t know precisely how your business is performing, you won’t be able to foresee problems and make positive changes to respond to them before it’s too late.
Luckily, modern technology has brought us solutions like ShopKeep POS for retail so that business owners can track sales, revenue, cost of goods, and other data for use in these KPI equations.
POS systems like ShopKeep track every transaction in real-time. That means sales data, inventory, and balance sheet information is always up to date. The software will also calculate some of the key KPIs we talked about in this post or provide you with the correct information so you can calculate other types of KPIs.
In the past, access to retail KPIs wasn’t as standard due to the sheer amount of time and money that had to be spent to calculate them. Today, with POS software that tracks sales and automatically generates performance insights, measuring retail performance and productivity has never been more accessible or more feasible.