The 8 Most Effective KPIs in Retail
It’s safe to assume that all entrepreneurs want their business to be successful. In order to achieve high-scale, long-term success in business, you’ll have to take a closer look at your KPIs.
But what is a KPI in retail? How can you use them? How can they be measured? This blog is a full guide to creating and tracking KPIs in retail.
What is a KPI?
KPI stands for key performance indicator. Key performance indicators are clearly defined metrics that measure and assess business performance. They may be based around sales, inventory, costs, and many more business factors. KPIs aren’t exclusive to brick and mortar retail stores. They can be used in e-commerce and adapted to other sales-based hospitality businesses too.
There are no set KPIs that every retail store must use since these indicators will depend largely on your individual targets or long-term goals. Businesses can set as many or as few KPIs as they feel necessary, but it’s best to make sure they’re relevant, realistic, and serve a specific purpose.
How to use KPIs to achieve business objectives
Retail stores should choose KPIs that align with their overall business objectives. The first step in creating KPIs is to consult your business plan and/or growth strategy. Then, define the KPIs that will accurately track the progress of your goals.
Each KPI must have a specific purpose, and as a rule of thumb with any objective, should be SMART (Specific, Measurable, Achievable, Relevant, and Time-based). Measurable, in this sense, means measurable using the hard figures, like sales and revenue, and qualitative measurements too like customer satisfaction.
Retail KPI examples
We cover eight important retail KPIs that look at different areas of business. You might want to use a combination of these metrics and adjust them to your specific needs. Then, read about how to measure these KPIs with pinpoint accuracy.
- Gross margins return on investment
- Inventory turnover
- Sales per square foot
- Sales per employee
- Average transaction value
- Customer retention (and customer service)
- Online traffic (omnichannel)
- Year over year growth
Gross margins return on investment (GMROI)
GMROI measures the amount you earn back in profit from the amount you pay to buy stock. Quite simply, it’s how much you earn vs how much you spent. To work it out:
gross profit / average inventory
GMROI helps you work out if specific items that you stock are earning profit. If you measure this KPI closely, it’ll help you determine specific product performance - how well something is or isn’t selling. It’s essential to track return on investment as it reveals where you should or shouldn’t invest your money in a much more detailed way than profit margins alone can.
Inventory turnover
Your inventory turnover will reveal how quickly you’re selling certain products, and if stock isn’t selling well. It helps you achieve the right stock levels, so customers don’t face waiting times when items sell out. It also prevents you from wasting money on items that won’t bring any return.
Calculate using this formula:
Cost of goods sold / average inventory
The golden number for an inventory turnover ratio is anywhere between 2 and 4.
Minimize out of stocks in your store by ensuring you have accurate stock data and use it to create more accurate demand forecasting based on previous trends. Use your point of sale (POS) to automatically reorder certain items when they hit a set level. Shift old stock by mastering suggestive selling and running exclusive offers. Going forward, be more selective about ordering stock.
Sales per square foot
This metric reveals the productivity of your store’s layout. It provides an insight into how well space is being used, not including changing or stockrooms. If one section is performing better than another, it may be due to the layout and display, or product type in that area.
Calculate using:
net sales / amount of sales space
Boost sales using visual merchandising by strategically placing small pick-up items close to the till, making use of your window display, and remember that “eye level is buy level”, so place popular or sales items accessibly around the store.
Sales per employee
When you’re running a small team, it’s important to find employees who are dedicated. This metric helps you schedule more effectively, and make better decisions when it comes to considering promotion and delivering staff initiatives.
To calculate:
net sales / number of employees
You can also use your POS to your advantage by tracking exact sales per employee. Set targets, encourage suggestive selling and upselling, or perhaps run a friendly competition between employees to boost sales.
Average transaction value
ATV stands for average transaction value, which means how much, on average, one customer spends in one transaction with your business, either online or in-person. Here’s how to work it out:
total amount spent / total number of transactions
Understanding your average transaction value can help you set better pricing for your products. A low ATV could be telling you that your higher-priced items aren’t attractive enough to customers to get them to make a purchase. Or, a low ATV but a high rate of transaction will tell you that you could raise your prices.
Customer retention (and customer service)
Your customer retention rate will reveal how well you manage customer relationships, as well as the typical customer journey with your business. Understanding why customers choose to shop with you rather than competitors, or in some cases why they don’t, is the key to improving your customer retention rate. Again, your POS is the best way to measure this.
When businesses increase their customer retention by 5%, they often grow their profits by 25% to 95%. Whether the issue lies with customer service, pricing, a lack of moral standing or unclear business ethics, there are a range of reasons why customers decide to take their custom elsewhere. Encourage repeat customers by knowing where your weaknesses lie, and setting a strategy to resolve them.
Online traffic (Omnichannel or E-Commerce)
While foot traffic is an incredibly important metric, in the era of the global pandemic, we’ve all realised just how important online traffic is too. This is particularly useful for e-commerce or omnichannel retail businesses.
This KPI can save you a lot of money when rolling out your marketing strategy. Use your website analytics to understand where customers navigate to on your website, then redesign accordingly to maximise sales. This should also help you overcome shopping cart abandonment, and improve your overall conversion rate.
Year over year growth
Year over year (YOY) is the best way to accurately measure long-term growth. SMART targets and quarterly KPI’s are necessary to achieve and sustain growth over a long period of time, but YOY provides a better insight into the difference that these efforts are making. Formula:
(current yearly revenue – previous yearly revenue) / previous yearly revenue x 100
To fully understand your YOY result, you’ll have to look at a range of factors. Some questions to consider:
- Have you recently changed business strategy?
- How active is your marketing and outreach plan?
- Are there any environmental factors that might have impacted sales?
- Are your competitors doing anything differently?
Streamlined omnichannel experience
Epos Now’s Retail POS Solution is designed specifically for merchants seeking an innovative, comprehensive business management system.
The multi-functional POS platform includes detailed reports and analyses that track in real-time for optimised efficiency. Access KPI metrics on product performance and view profit percentage per sale or over a certain period of time to help you make better-informed business decisions.
- Manage your stock, staff, sales, data, and payments from anywhere
- Filter reports based on time, salesperson, or specific products
- Receive stock alerts, so you never miss a selling opportunity
- Easily add, edit and bundle items to create new revenue opportunities
- Full barcode management: import, update, and manage 1,000s of products
- Integrate with over 100 apps, including leading accountancy and CRM tools
Get in touch today to request a callback from our expert advisors.