The Top Eight KPIs Retailers Should Be Tracking (with Formulas)
As a retailer with a top notch retail management system, you have access to a plethora of metrics. It’s easy to get overwhelmed with the amount of data at your fingertips, so this is where Key Performance Indicators (KPIs) help you determine which metrics can be used to keep your business moving in the right direction. KPIs are useful in making proactive business decisions and, when regularly monitored, provide you with insight into important areas of your business. Every retail business is different, so some of the metrics provided in this blog may not be relevant to your operations. In any event, these are the KPIs that we feel are extremely important for any organization. For your convenience, we have provided the calculation formulas, so you can quickly and easily begin implementing these metrics into your business.
#1 Gross Margin Return on Investment (GMROI)
GMROI might be the most important KPI to track in your retail business, because it gives the best overall picture of your store’s performance. Simply put, GMROI measures your profit return on the dollar amount invested in inventory. This answers the difficult question: “How much am I making per dollar invested in inventory?” It is critical to track this metric, because it allows you to analyze how your business is doing overall, as well as how you can optimize inventory, pricing, and merchandising on specific products.
Calculation: Gross margin / average inventory cost = profit return
#2 Sales per Square Foot
First and foremost, retailers should track sales per square foot, which is simply the store’s average revenue for every square foot of sales space. This is a vital KPI to track because it helps you understand if your sales space is efficient. Specifically, it helps you understand what areas of your store are more profitable and allows you to align your sales and marketing efforts based on revenue by location. Next time you are trying to determine your store layout, analyze this metric and optimize the way you arrange your products.
Calculation: Total sales / total square feet of sales space = sales per square foot
#3 Inventory Turnover
Inventory turnover, also known as stock turn, simply means the number of times inventory or stock is sold during a defined period of time, however most retailers track this metric annually. It is important to track this KPI, because it gives you insight into how much product you are selling, and allows you to analyze your inventory levels and determine if it is too large or too small. This in turn helps increase overall efficiency by reducing inventory costs and increasing profits.
Calculation: Cost of goods sold / average inventory = inventory turnover (per defined time period)
#4 Average Purchase Value
As a retailer, you want to know on average how much each customer spends in your store. You can analyze your average purchase value and quickly determine the average dollar amount per transaction, in a given time period, perhaps daily, monthly, quarterly, or yearly. This is a vital KPI, because it can help you optimize your pricing and sales strategies, such as bundling items and increasing prices on low dollar amount items.
Calculation: Total revenue (for a given time period) / number of transactions = average purchase value
#5 Total Sales Count
Sales count is an imperative, yet straightforward metric. It measures the total number of transactions processed in your store within a given time period. The reason this is so important to track is because it helps you determine how much product you sell and how busy your store is throughout the day, week, month, or year. In turn this can help you align employee schedules, marketing efforts, customer service, and so on. For example, if you are consistently the busiest from 12 PM to 3 PM every Saturday, then you would know to increase staffing at that time. Similarly, if your least busy times are Monday mornings, you know that you don’t need the same number of people in your store as you would on Saturdays.
Calculation: Total number of sales in a defined time period
#6 Product Returns
All retailers should be tracking product returns because it allows you to identify any problems with product quality, customer service, and sales or marketing promises. For example, perhaps one of your sales representatives promised that your product would do something that it, in fact, did not. By analyzing the nature of all product returns, you can investigate the areas where your retail business may be falling short. In sum, product returns simply mean the percentage of products returned in a given time period.
Calculation: (Number of returns / number of items sold) x 100 = product return percentage
#7 Sell-Through Percentage
Another KPI is the sell-through percentage, which simply means the percentage of items sold, compared to the amount of items that were available for sale. This is important to track as a retailer, because it educates you on how your products are performing, which as a result helps you make better decisions about sale items and re-order quantities.
Calculation: (Number of items sold / beginning inventory quantity) x 100 = sell-through percentage
#8 Profit Margin
Profit margin is an obvious metric, but we can’t overlook the importance of knowing how much money you are actually earning after deducting the costs of goods sold. Additionally, it allows you to determine if your sales are costing you more than you’re making. That way, you know exactly how to adjust your overall operational costs and prices of items.
Calculation: (Gross profit / total revenue) x 100 = profit margin percentage
These are just a few KPIs you can track in your ERP system, to help you determine how your retail business is operating on the inventory, sales, and marketing level. Every retail operation is different, so you may need to customize your metrics and ERP dashboard to reflect the areas of your business you would like to analyze.
We feel the above list includes crucial metrics to improve your overall efficiency, and hope you found this article helpful. For more information on retail metrics and dashboards, read ArcherPoint's retail blogs to see how an end-to-end retail management system can help you grow as a business, while reducing operational costs.