Every business needs to set smart business goals that are measurable to track performance, maintain profitability, and continue growing. Without specific goals, you risk wasting your time and your budget, among other resources. For these reasons, Key Performance Indicators (KPIs) are an essential aspect of modern retail business.
We will explore essential retail KPIs in this article, giving you what you need to know to analyze and apply these metrics to your business growth activities in an efficient way.
Let’s get started.
A KPI is a measurable value that you can use to track performance over time in line with business objectives. By evaluating it in comparison to previous years, you can determine whether you are achieving your business objectives and identify if you must make adjustments.
Higher-level KPIs often focus on the overall performance or growth of the business, such as number of sales or profit margins. On the other hand, low-level KPIs tend to focus more on processes in specific departments of your business, like marketing, sales, HR, and customer support.
When looking at a KPI, retail companies might be looking for information on customer satisfaction, net sales, product movement, growth, and a variety of other aspects.
There are three vital characteristics of KPIs:
- Quantitative - All KPIs should be presented in the form of measurable numbers.
- Practical - Your KPIs should fit in well with your current business practices.
- Actionable - Your retail KPIs need to be something that you can act upon to improve business results.
When you have these types of KPIs, you can understand if your business meets its promises to investors and customers. It also helps identify needs or opportunities that require attention.
Retail companies are unique from other types of business. You need to deal with inventory, turnover, operating expenses, and sometimes thinner margins than your average company. Some KPIs will be more relevant for you than others, so you should identify the ones that are best suited to your business goals.
When you’re ready to start tracking performance, here are the best KPIs in retail:
The GMROI measures how much profit you get from the money you invest in stock. Essentially, it answers the question of "For each dollar, I spent on inventory, how much do I get back?"
The formula is as follows:
GMROI = Gross Profit / Average Inventory
You can apply this to select portions of your inventory to see if specific products turn a profit. If they don't, you have a few options:
- Increase your prices to increase the average order value.
- Reduce your average inventory cost by negotiating deals or finding a cheaper supplier.
- Improving inventory turnover to minimize wasted spend.
Gross profit margin is how much money you make after deducting the costs of making and selling your product. It uses the following formula:
Gross Profit = Sales Revenues – Cost of Goods Sold
Net profitmargin is how much you're left with when you deduct your cost of goods and your other expenses. These expenses include staffing, administration, operations, taxes, and interest paid on debt.
The formula for net profit is:
Net Profit = All Revenues - All Expenses
If you aren't making enough net profit, you might find most of your problems arise from your cost of goods. Net profit is an important KPI retail businesses should focus on and seek to improve by reducing operational costs.
Your break-even point is when your total revenues equal your total expenses:
Break-even = All Revenues = All Expenses
As with any retail KPI, the magic is not in the number. The true insight comes from the context. Obviously, you want to break even, and more so, to be profitable.
However, consistency over the long-term is also something to consider, as breaking even on a marketing campaign can turn to profit as the customer makes repeat purchases.
This retail KPI is used to determine how many items (units) a customer purchases with each visit. A higher UPT could mean that you provide great value or provide the exact types of products your market is looking for.
Here is the calculation for UPT:
Units per Transaction = Items sold / Number of transactions
You always want to maximize store visits by increasing the number of units bought. Doing this increases revenue in the short-term and long-term. When customers discover new products and buy them once, it increases the chance of repeating that purchase a number of times in the future.
This retail KPI shows you how much customers are spending on average with your store. It is represented by the following formula:
Average order Value = Total Revenue / Number of Transactions
A higher ATV could mean that your customers are purchasing multiple items or a single high-dollar item. If your ATV is low, it might mean that it’s time to rethink your pricing strategy.
It could also mean that you need to experiment with new sales tactics such as upselling. ATV is a great KPI for retailers to understand how much value they’re offering.
The higher the average customer spending, the better your profit tends to be. It means you can spend more on marketing and other expenses to earn that transaction — making your business more competitive.
Your monthly sales target is how much you want to produce in sales revenue that month:
Monthly Sales Target = Total Revenue Desired for the Month
Your sales metric is the king in retail. As you increase the number of sales at the same price point, your profit and revenue will increase. This growth tends to fix a lot of problems. Your cash flow, reserves, and ability to reinvest in the business will all increase.
If you are not hitting your monthly sales targets, it could be for several reasons. You might have a seasonal product that only produces revenue in certain months. Additionally, there could be an issue with your advertising campaigns, sales process or sales personnel.
This KPI will tell you how much each category is generating in terms of revenue. For instance, if you own a fashion ecommerce store, you might have product categories like jackets, t-shirts, hats, footwear, and belts. Let’s imagine you notice “Hats” is the lowest-selling category.
Without looking at this KPI, you wouldn’t know what needs to be addressed in the first place. But with the data in hand, you can change your signage, your marketing, and your products themselves to meet market demand, and attract more potential customers.
The Cross-selling Rate tells you how many of your transactions involve cross-selling. Cross-selling (upselling) is a great metric to look at because it tells you if you’re doing a good job of maximising purchases with each visit. Here’s the formula:
Cross-selling Rate = Number of Cross-selling Purchases / Total Number of Purchases
Try to offer an additional, related product with each purchase that a customer might make. If you sell shoes, offer shoelaces as an accessory. An additional benefit to cross-selling is that the upsell is often more profitable (ratio-wise) than the core product — even if the dollar amount is lower.
The conversion rate is the number of visitors who made a purchase. It is calculated like so:
Conversion Rate = Number of Conversions (Sales) / Total Number of Visitors
With this KPI, retail stores can see how good they are at turning shoppers into paying customers. Traffic to your store is always good, but if you aren't taking advantage of it, then you won't see any benefits to your bottom line.
One of the first places you can start to improve the retail conversion rate is on your website landing pages. If your website doesn’t present products in the best light, without clearly demonstrating the benefits, then customers may not see the value you offer. By optimising your product landing pages with benefit-led descriptions and strong calls-to-action, you can drive more people to conversion.
Customer Retention rate tells you how many of your customers you have maintained over a given time period.
To see how well you are retaining customers, use the following formula:
((CE-CN)/CS)) x 100
CE = number of customers at the end of the period.
CN = number of new customers acquired during the period.
CS = number of customers at the start of the period.
You can consider starting a customer loyalty program, survey, or other means to earn repeat customers. By keeping your finger on the pulse of your market, it’s possible to build sustainable business.
The amount of time that someone spends at a display is called the dwell time.
The shopper dwell time formula is:
Average Shopper Dwell Time = Total Minutes Spent in Store for All Customers / Total Number of Customers
This metric has a positive correlation with purchases, so it’s a good idea to keep track of this retail KPI. There are two steps to increasing dwell time.
First of all, you need to set up a system for tracking this metric. Online, we use metrics like average visit duration.
Secondly, you need to increase this dwell time by experimenting with more enticing design and information in your store layout, products, and promotions.
The return rate is the number of returns you receive out of your total units purchased:
Return Rate = Total Number of Product Returns / Total Number of Products Purchased
Customer return (refund) rates are around 5-10% these days and 40% for online purchases. This represents a big problem for retailers. No matter which way you look at it, you need to assume that you generate around 80% of the revenue you think you do.
There are several reasons that customers return their purchases. Often, it is industry-specific. For clothing, they might not like the fit. In home decor, a customer may change their mind after seeing the item next to their actual wall color. Only you can investigate the real reason, but the metric tells you if it needs to be addressed or if it is in line with the industry average.
This metric tells you which channel is generating more revenue:
Online Sales - Brick & Mortar Sales = Total Difference in Sales
This retail KPI is one of the most critical data points to analyse in modern business. If you are not already selling at least a portion of your inventory online, you're missing out — especially after 2020 brought a global pandemic onto the scene.
Even if your product "must" be sold in-person, you can advertise it online, on your website or social media.. For example, your website can funnel inquiries to your sales and customer service team, so you don't alienate customers who like to browse online first. As long as your total sales are increasing, you’re heading in the right direction.
Retail stores that stick around for the long term understand their numbers. In a hyper-competitive, global marketplace, every chance to create more profit and cut losses matters. Of course, this means knowing the right retail KPIs to analyse in the first place.
The KPI retail metrics above can be overwhelming. However, if you go through each one individually, you will see how many metrics feed into the others.
Managing, tracking, and improving these KPIs with retail analytics will help your business adapt and thrive in an ever-changing marketplace. This proactive approach will strengthen your business to weather the storms of pandemics and other challenges that will come in the future. Ultimately, tracking KPIs enables you to improve the customer experience, and make smarter business decisions that make your ecommerce store more efficient and profitable.