With the holiday season upon us, retailers are scrambling down the metaphorical chimney to make sure they’re driving as much revenue, brand awareness, and customer loyalty as possible. It may seem like retail leaders can simply gauge the health of their company through observing foot and digital traffic and sales volume, but truly understanding where your company is headed requires a deeper dive.
Measuring key performance indicators (KPIs) is crucial for understanding the value of sales and marketing efforts and whether retailers can stay profitable and increase revenue year over year.
But what metrics really matter? With a constant influx of data from multiple sources (social media, Google ads, CRM tools, etc.), how can retailers tune out the noise and focus on the KPIS that measure their company’s value and drive growth?
Let’s look at some of the most important KPIs for today’s retail companies, why they matter, and how to measure them.
1. Average order/transaction value
Calculate: Total sales from transactions / Total distinct count of transactions
If you have the same average number of customers as your competitors but your average transaction value is higher, you’ll pull ahead and grow at a faster rate. Sales and advertising tactics like promotions “Buy one, get one 40% off; free shipping on orders over $X, etc.) and bundling can help you increase your average transaction value over time.
2. Gross margins return on investment (GMROI)
Calculate: Total gross profit / average inventory cost
In a nutshell, this metric tells you the profit you get back compared to the money you invest in your product inventory. GMROI gives you a more granular view than overall sales, because you can calculate it for individual products and product categories. This KPI helps retailers determine if they have too much or not enough product, and which products will bring the most value with more investment.
3. Conversion rate
Calculate: Total number of conversions / Total number of analysis-relevant interactions * 100
One of the staples! Anyone in any sort of sales or marketing position is versed in this KPI. You want to know which of your advertising efforts turns “I’m just browsing” into a transaction, and at what rate. Conversion equals growth. It’s also interesting to take note of time of day with the most conversion, whether most transactions from new or repeat customers, and time between landing on your site or walking through the door to making a purchase.
4. Customer retention rate
Calculate: ((Total distinct customers at end of period) - (Total new distinct customers acquired during period)) / (Total distinct customers at start of period) * 100
Customer loyalty is absolutely critical for building a retail business that can withstand economic highs and lows. You still want to attract new customers, of course, but a solid base of repeat shoppers (who usually tell their friends about your company) can mean the difference between growth and failure. Measuring customer retention is typically easier with online/digital sales, as there are several tools available to track the number of repeat vs. new customers.
5. Foot traffic and digital traffic
Calculate: Total store entrances OR total web sessions
This one is pretty self-explanatory. While it’s a basic metric, measuring foot or digital traffic is the first step for several of the other KPIs - for example, how could you measure conversion without knowing how many people actually visit your store? More shoppers means more opportunities for a sale, so understanding where you stand now helps you optimize your strategies for attracting more customers through your real, or digital, door.
6. Inventory turnover ratio
Calculate: Total cost of inventory sold / average inventory cost
Is your inventory flying off the shelves? Is it sitting there like a lump of coal? Tracking inventory turnover helps you see which pieces are in-demand and which aren’t popular, so you can reallocate that cost on the products that bring value. Things like season, trends, and holidays can affect this KPI - your swimsuits would be quite a bit more popular in summer than winter, or some of your smaller items might see an uptick in December as stocking stuffers. Keeping tabs on your inventory turnover means you’re prepared to give your customers what they want, when they want it.
7. Gross and net profit
Calculate gross profit: sales revenues – cost of goods sold
Calculate net profit: all revenues – all expenses
The best metric of all - profits! You’re in business to be profitable, and tracking gross and net profits is the most basic way to know how your company is doing. Your net profit is what you have left after removing the cost of the goods + business expenses, and your gross profit is your profit minus the actual cost of creating and selling the item.
8. Year over year growth
Calculate: (current period revenue – prior period revenue) / prior period revenue x 100.
If you don’t compare your current status to past years, it’s impossible to really know if you’re growing and at what rate. Retail companies should be constantly looking to innovate and improve, and measuring this KPI helps you understand your trajectory and make adjustments, if needed, to plan for the future.
No matter the season, the retail industry is dynamic and largely dependent on external economic factors. But tracking these eight KPIs can not only give you a clear picture of your business health and value in the market, but set you up to grow, attract and retain your loyal customers, and stay profitable through the ups and downs.
Want to make it easier to track these metrics? A managed data warehouse like Panoply provides a single source of truth for all your key business data. Book a demo today to see how.