What is a Retail KPI?
A retail Key Performance Indicator (KPI) or metric is a clearly defined and quantifiable measure that can be used to assess the performance of a retail business. These performance metrics can be used in a variety of ways. The most common example being business owners identifying areas of weakness to help make informed business decisions.
Who Should Be Using Retail KPIs?
The short answer is everyone. Everyone in the retail industry should be using retail KPIs to some extent. Whether you are a seasoned sales veteran or someone just starting, you should be using KPIs to track your performance. But let’s take a step back and establish what retail means.
When most people think of the word “retail” they immediately think of brick-and-mortar stores. However, this is no longer the reality of the retail industry. Over the last two decades, the retail industry has seen a massive migration to online marketplaces. As such, the barriers to entry have been reduced and it has become easier for people to start their retail careers and experiment with different sales tactics. This has also resulted in a lot of people having to learn how the retail industry works from scratch. To help business owners with their analytics, we recommend the use of a retail KPI dashboard. Here at insightsoftware, we have compiled a retail KPI list to help get you started.
Retail KPIs for Evaluating Sales Data
Retail sales data can help shed a lot of light onto the shopping trends of your customers or help measure how different locations are performing. Here are some retail KPI examples that you can use to measure shopping trends:
- Sales per Square Foot – This is one of the most effective and commonly implemented retail KPIs. The sales-per-square-foot metric compares the revenue of a store with the amount of floor space the store occupies, measuring a location’s efficiency. This is an important measure as space tends to be expensive.Sales per Square Foot = Revenue/Selling Area
- Year-Over-Year Sales – Everyone in business wants their sales numbers to go up. The most common way to track sales is by comparing quarterly sales with those of the previous year. However, this retail performance indicator is best used in conjunction with another KPI that can help explain why sales were up or down (i.e., maybe new products, promotions, or staff helped drive sales).Year-Over-Year Sales = ((Current Year’s Sales – Last Year’s Sales))/Last Year’s Sales) * 100%
- Average Transaction Value – This retail metric gives you an idea of how much a customer spends on average each visit. If customers are spending lots, it can indicate that your higher value products are more popular, or that they are buying in large quantities each visit. A lower value on the other hand can indicate the opposite.Average Transaction Value = Revenue/# of Transactions
- Sales per Employee – A little bit of friendly competition between sales staff can often be motivational. The Sales per Employee retail KPI provides a perfect way to track that. These data can be further used for performance reviews, determining compensation, and evaluating training needs.
- Cost of Goods Sold (COGS) – How much did your merchandise cost you? Have the costs changed over time? This retail performance metric tracks how much it costs you to acquire or manufacture your goods. This information can be used to help set your prices, membership rewards, and is essential for your accounting records.COGS = Starting Inventory – Ending Inventory
- Online vs In-Store Sales – If your business started in a brick-and-mortar store, you have probably expanded to an online marketplace of some sort. Or maybe you started online and opened a physical retail location after. Regardless, you should be tracking how much revenue is coming from each source. This retail KPI can help you decided if both retail channels are necessary, or if it is more efficient to only have one of the two.
- Shrinkage – This is one of the most important retail metrics that you should be keeping track of. Shrinkage is the loss of inventory attributed to anything other than sales. There are several common causes of shrinkage: Administrative errors, employee theft, shoplifting, and supplier fraud.Shrinkage = Ending Inventory Value – Actual Inventory Value
- Sell Through – The sell-through retail metric tracks the percentage of units sold vs total available units. This is an exceptionally good way of evaluating a product’s performance and comparing it with other products you sell. Typically, this retail KPI is best used on a weekly or monthly basis.Sell Through = (# of Units Sold/Starting Inventory) * 100%
- Gross Margin Return on Investment (GMROI) – Do you know how much money your inventory is making you? The GMROI ratio is used to evaluate your inventory’s profitability. The higher the ratio, the higher your margin on each product. However, selling products with a super high GMROI ratio does not always mean making lots of money. It is important to take into consideration how many sales you are making, the margin, and how much the inventory will initially cost you.GMROI = Gross Profit/Average Inventory Cost
Evaluating sales data is particularly important, as it can help improve the financial efficiency of your business. However, you do not have sales without customers. The next section will look at a list of retail KPIs that pertain to customer habits.
Retail KPI List for Evaluating Customer Habits
Most retail KPI examples revolve around sales and financial data, but really, you need to have customers first. It doesn’t matter how much margin is built into your products if you don’t have any customers willing to buy them. Here is a list of our favorite KPIs for evaluating customer habits:
- Customer Retention Rate – TAs many business owners already know, it is more costly to acquire a new customer than retain an existing one (which is why loyalty programs exist). This retail metric tracks how many of your customers come back to your store for a second visit (or more).Retention Rate = ((# of Customers at Period End – # of New Customers During Period))/(# of Customers at Start of Period)*100%
- Customer Satisfaction – This retail metric is often used in conjunction with the customer retention KPI mentioned above. There is usually a strong relationship between customer satisfaction and retention. However, it is often difficult to obtain good data to measure customer satisfaction. Most businesses try to incentivise customers with a reward for filling out a survey.
- Traffic – This retail key performance indicator is applicable to both physical stores as well as online shops. It tracks how many people physically walk into your store or visit your webpage. These data can be used to measure how successful an ad campaign or product launch is. With physical stores, it can also be used to compare the popularity of different locations.
- Units per Transaction – This retail metric is as simple as the name implies—it tracks the number of items sold in a transaction. It is very useful for evaluating sales trends (seasonal, promotions, etc.) or employee performance.Units per Transaction = # of Units Sold/# of Transactions
At this point, you should be starting to get a feel for what makes a retail KPI. Congrats! However, the journey isn’t over yet. How do you keep track of all these KPIs? Remember how we mentioned retail KPI dashboards early on?
Streamline Your Reporting with Retail Reporting Software
A lot of people start tracking retail KPIs and metrics with Excel. This is probably the cheapest way to start. However, it is difficult to set up good Excel sheets, and it really takes a power user to do things properly. This is where insightsoftware saves the day. We offer user-friendly reporting software that can manage all your KPIs. Check out some of the benefits:
- Interface with Other Services. Maybe you already have an ERP that you are using. Good news. Our retail reporting software interfaces with your existing ERP and automatically collects the data it needs.
- Keep Your Data in One Place. Our retail dashboard makes all your data available from one place. No need to search around for the data you need.
- Pre-Built Templates for Your KPIs. Why spend the time setting up Excel sheets when we have already built them for you? insightsoftware is out-of-the-box ready.
- Instantly Create Reports. Picture this: Your data are collected for you, kept in one central place, and your reporting templates are ready to go from day one. This means that reports can be generated instantly from day one.
Those are some good benefits, right? Anyway, back to the retail KPI lists. Up next, we have merchandising KPIs followed by financial metrics.
Have you ever wondered why some products sell better than others? Well, there are a lot of factors, but a lot of it has to do with merchandising. Here are some examples of KPIs in merchandising:
- Inventory Turnover – One way of tracking your merchandising performance with a KPI is by measuring your inventory turnover. Try putting different items at the front of your store, or on the front page of your online marketplace, and see how it impacts your inventory turnover.Inventory Turnover = Cost of Goods Sold/Average Inventory at Cost
- Conversion Rate – We often hear about conversion rates when talking about online businesses as it is easy to track online traffic, but this retail metric is just as applicable to brick-and-mortar locations. The conversion rate metric measures the number of visits that convert into sales. This is commonly used to evaluate the performance of ads or promotions.Conversion Rate = # of Sales/# of Visitors
- Shopper Dwell Time – How much time are people spending in your store or on your website? Do you know what section they are spending the most time in? The shopper-dwell-time merchandising KPI is used to track how much time each customer spends in each section. Typically, the longer someone spends looking at a product/display, the more likely they are to make a purchase.
- Click-Through Rate (CTR) – This retail metric is exclusively for online marketplaces. It is used to evaluate how well your marketing campaigns are performing. The CTR measures how many times your ad was clicked vs the number of times it was seen (impressions). Ideally, a higher CTR is better, but only if it results in conversions. Lots of people clicking, but not purchasing is not what you want.CTR = # of Clicks/# of Impressions
These examples of KPIs in merchandising will help you identify which sales tactics are working and which ones aren’t. However, they won’t ever give you a true picture of your business’ health. This is where financial retail metrics come into play.
Financial KPIs for the Retail Industry
Every business in the world has to keep track of their finances in some way or another. Whether people know it or not, they end up using financial KPIs to measure their performance. To make this easier, we recommend the use of financial KPI software. Here is a list of financial KPIs that a retail business should be tracking with reporting software:
- Operating Expense (OPEX) – Your operational expenses are any costs associated with operating your business on a day-to-day basis. These include rent, inventory, insurance, payroll, etc. Depending on how you operate your retail business, your OPEX can vary a lot. For example, having a physical brick-and-mortar location will cost a lot in rent, while an online business that drop-ships products could have no rent.
- Quick Ratio – Probably considered the go-to ratio to quickly assess the health of your business. The quick ratio measures your ability to meet your current liabilities immediately and without selling any inventory. A ratio above one is desirable and means you are in good financial health.Quick Ratio = (Cash + Marketable Securities + Accounts Receivable)/Current Liabilities
- Current Ratio – The current ratio is another commonly used financial metric that measures the health of a company. Similar to the quick ratio, it measures a company’s ability to meet obligations. However, this ratio takes a more realistic approach and checks to see if a company can meet its obligations within a year.Current Ratio = Current Assets/Current Liabilities
- Accounts Payable Turnover (APT) – This is a very common financial metric that retail companies use to gauge their financial position from a cash flow perspective. It does this by tracking the amount of time a company takes to pay its suppliers.APT = Total Supply Purchases/((Beginning AP – Ending AP)/2)
- Days of Inventory Outstanding (DIO) – It is important to have a well-stocked inventory, but it is equally important that your inventory is moving. This retail KPI tracks how long it takes your inventory to turn into sales.DIO = (Average Inventory Cost/COGS) * 365 Days
- Days Sales Outstanding (DSO) – You like it when people pay you quickly, right? It is very satisfying to see the immediate results of your hard work. This financial KPI measures how long it takes to receive payment after a sale.DSO = (Accounts Receivable/Total Credit Sales) * Number of Days in Period
- Days Payables Outstanding (DPO) – How long does it take you to pay a supplier? This is like the DSO metric, but instead, you are evaluating how many days it takes you to pay your creditors.DPO = (Accounts Payable * Number of Days in Period)/COGS
- Cash Conversion Cycle (CCC) – The CCC metric gets a bit more into the nitty gritty details of retail accounting and financials. This retail performance metric measures how many days it takes to convert goods back to cash. Ideally, you don’t want to be sitting on goods for a long time.CCC = Days of Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding
- Net Profit Margin – Do you know what your bottom line is? Hint: it might be this KPI. Your net profit margin (aka bottom line) is THE most important financial KPI for any business, retail or not. It measures how much money you are making relative to revenue. The higher the number the more profitable you are.Net Profit Margin = (Net Income/Net Sales) * 100%
Hopefully you found these top 26 retail KPIs and metrics for 2020 insightful. At insightsoftware, we strive to make your life easier when using KPIs and reporting software to grow your business. Contact us now if you wish to learn more about our reporting solutions.