The best retailers always keep a close eye on the numbers.
Without carefully monitoring cash flow, for example, store owners will have a hard time keeping their doors open.
But there are so many other retail metrics that should be tracked — from inventory reports to marketing funnel conversion rates — that it can be difficult for owners and managers to decide which numbers to focus on.
However, there are certain metrics that are especially helpful at gauging the health of your retail business.
These “key performance indicators” are numbers that can lend big insights to help you identify both problems and best practices for your specific needs.
If you’re a retailer, here are a few KPIs we suggest focusing on:
Gross Profit and Net Profit
You already know that profitability is about the most important thing you can measure for your business. Your store could be bring in thousands of dollars in cash each day, but that doesn’t matter much if you’re spending even more.
Profitability can be measured a few different ways.
“Gross profit” refers to the amount of money collected for goods sold over a defined period of time, after the cost of the goods is subtracted.
“Net profit,” on the other hand, subtracts not just the costs of the goods sold, but the costs of all of your other business expenses, such as your rent, infrastructure, and employee costs.
Ideal profitability can range based on what you’re selling and your goals. Many small businesses aim for a gross profit margin of between 25 percent and 35 percent. Net profits, in particular, vary a lot by industry and tend to be much smaller. For example, Amazon’s net profits each year have been just 2%. The mean and median for other industries hovers around 7 percent. To understand what your net profits should be, you’ll need to get more information about similar businesses.
Regardless of your target profitability, you’ll want to keep an eye on both indicators. Gross profits can let you know when a problem is directly related to issues with pricing, or inventory sourcing and purchasing.
If your gross profits seem healthy but net profits are low, you might need to figure out ways to lower overhead costs or streamline operations.
Average Transaction Value
This metric is important because understanding how much people spend each time they shop with you can be an important way to boost profits.
Generally, retail businesses have already invested some money into each person who walks into their store, usually by way of marketing campaigns and other visibility initiatives. Understanding how much each customer spends (and where they came from) can be critical for tracking the ROI of your marketing campaigns.
Smaller transactions are also more expensive for your business. They bring in much less revenue than big purchases, but the credit card fees, transactional costs, shopping costs and operational costs (such as the costs of having an employee assist and ring out the customer) are often the same.
With a good point of sale system, you can determine how your average transaction value has changed over time and identify some goals. You can also make a plan to raise the average transaction value at your store by using some of the following tactics:
- Sales strategies (such as upsells, cross selling discounts, incentives for employees, and special discounts for bigger orders)
- Marketing tactics (promote some of your higher-priced items)
- Pricing and inventory strategies (keep smaller items by the register to add to existing purchases)
Revenue per Employee
Understanding how much each employee rings up during their shifts and how much your employees are selling on average can be a crucial component of small business strategy.
If one employee consistently undersells the others, for example, it could be indicative of a big problem that could be costing your company significant revenue (perhaps they’re simply not being attentive to customers, for example). If one consistently outperforms, you’d be missing a big opportunity by not exploring what they’re doing right and sharing those tactics with the rest of your team. If you’ve noticed that existing employees aren’t selling as much as employees have in the past, it might be time for some sales training.
Understanding how much each employee sells, and how much your employees are selling on average, can help as you’re planning special incentives or bonuses for them. It can even help for scheduling purposes (for example, you may want to incentivize your top sellers to work on your busiest days).
The best point of sale systems will allow you to run your “revenue per employee” data against other helpful data, too, such as the revenue data for specific times of day, days of the week, and even special events. With these reports, you can make sure that those factors aren’t what’s actually influencing employee performance.
In-Store Conversion Rate
If you’re still investing in a brick-and-mortar store, you need to absolutely make sure that the space is driving revenue and is worth the investment.
Not only do physical property costs often make up a significant portion of overhead costs for retailers, it often requires a significant investment just to get people to walk inside.
For example, most stores spend a lot of time and money on reaching out to potential customers online, running special promotions, making their signs and window displays more interesting, or simply paying more money for a location with better visibility and street traffic. You don’t want to lose all that effort in the end by failing to land the sale once the customer finally walks in.
That’s why it’s crucial to know whether the people who walk into your store are actually spending money — or leave after just looking around.
Counting customers isn’t exactly easy, but there are plenty of tools that can automate the task.
Once you have accurate customer counts, you can compare them to the transaction data gathered by your point of sale system and figure out how your conversion rate stacks up and fluctuates over time.
If you’re not ready to invest in a foot traffic monitoring system, some careful observation of customer behavior throughout the day can sometimes yield valuable insights on its own.
Once you have an idea of how traffic is converting to customers, you can experiment with different tactics to boost in-store conversion rates, such as changing up sales procedures, store layout, merchandise, staffing ratios, and even prices and promotions to see if they make a difference.
Although tracking in-store conversion rates is a powerful tool, the best retailers are able to connect that in-store behavior to customers’ online behavior using one comprehensive system.
Cloud-based software that integrates ecommerce with marketing, customer relationship management, and inventory management software can give retailers a clear picture of how people move through their entire sales funnel. It can also impress customers, who are increasingly expecting this type of integrated experience from retailers.
These cloud-based systems are powerful, but finding the right combination of integrations and programs can be a daunting task for business owners who have businesses to run. If you’re ready to begin the journey of updating your software solutions, we invite you to partner with us at Cloudscape Technologies.
We are certified experts for the best cloud-based software solutions on the market, and we empower business owners to find and implement solutions that are perfect for their business.