When running a small business, there are no small decisions. You have to dig into the retail details and analytics that deliver the data behind every transaction and interaction that happens in your store.
That’s where Key Performance Indicators (KPI) come in — numeric values that indicate whether your business is reaching its targets. They provide a way to evaluate your organization’s performance and make data-driven decisions to help grow your successful business.
But yet, a survey by Geckoboard found that 49% of small and medium-sized business owners have failed to identify any KPIs. Business owners who did track KPIs were about twice as likely to hit their targets!
While there are literally hundreds of KPIs that a business could be tracking, these below are of particular and ubiquitous importance across most forms of retail.
How to measure: Sales revenue = income from sales of goods and services – the cost associated with things like returned or undeliverable merchandise.
Simply put, sales revenue is how much you’re selling. Month-over-month sales results can tell a lot of things about your company. Are people interested in buying your product/service? How are your marketing efforts paying off? Are you beating out your competition?
When evaluating your sales revenue, be sure to take into account things like changes in the market, previous marketing efforts, etc. as there are a lot of factors in play. Growing your sales revenue should be a long-term goal, and the most obvious way to increase this metric is to increase the number of sales. Think about expanding your marketing efforts, hiring new staff, or creating a retail environment that is hard to resist.
Net profit margin
How to measure: Net profit margin = total sales revenue – total business expenses (direct cost + indirect cost + taxes + interest)
This answers one simple — yet very important — question: are you making money with your business? It factors in all business costs, including marketing and labor, and tells you if you’re in the red this month or successfully in the black.
The easiest way to increase your net profit margin is by increasing your revenue, which can be accomplished by selling more and raising the price of the products that you’re selling. Or, on the flip side, lowering the cost of some items to increase the volume of items sold. Try cross-merchandising new services or goods that complement your current offerings. Knowing your net profit allows you to constantly locate and test new strategies to see what works best.
How to Measure: Gross margin = (total sales revenue – cost of goods sold) / total sales revenue
This is your company’s productivity as translated into numbers. Gross margin tells you how much you’re earning versus how much you’re spending to acquire goods. It’s extremely important because it tells you how much you can afford to spend on operating costs like payroll, rent, and marketing.
How to measure: (Year 2 Total Sales – Year 1 Total Sales) / Year 1 Total Sales x 100
This is exactly what it sounds like — a comparison of how your sales compare from one year to the other, which is important given that retail is often seasonal. With this KPI, you can compare apples-to-apples — or rather, annual revenue-to-annual revenue — about the performance of your business.
The equation above may look confusing, but to find the total sales revenue for your most recent 12-month period (year 2) subtract the total revenue from the year before (year 1). This gives you the change in revenue over the past year. Now divide this by your total year 1 sales and multiply by 100. This gives you your growth rate.
Average customer spend
How to measure: The total sales revenue made to date / the total number of customers to date.
This KPI measures the average customer transaction value, or how much the average customer spends on your products/service. The easiest way to improve on this metric is to increase the price of your products.
If you don’t feel that that’s an option, offer more perceived value than your competition through improved product packaging, creative merchandising, displays, and educating your customers to better understand the value of what you sell. Upselling is also an effective strategy, as is cross-selling similar items together in a bundle.
Customer acquisition cost
How to measure: Divide all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in that time frame.
This refers to the amount of money that you need to spend in order to acquire one paying customer. Customer acquisition cost is a KPI that will help you direct all future marketing efforts. If the costs to get money from customers can be reduced, the company’s profit margin improves, you make a larger profit, and everyone is happy.
The caveat here is that it takes time for any traffic campaign to start generating revenue and most retailers have several different marketing campaigns going at once (for example, print, Internet, etc.)
Website conversion rates
How to measure: Plug a tool like Google Analytics into your e-commerce website so that you can monitor traffic and sales conversions.
For every 100 people who visit, two should become paying customers.
This is the most critical metric when it comes to determining how effective your website is at driving sales. If your goal is to drive traffic to your website, it’s difficult to determine how effective your marketing efforts are if you don’t measure how many of those visitors become paying customers. This tells you if your marketing is effectively recruiting likely buyers or people who are just visiting the site with no intention of purchasing a product.
Inventory turnover rate
How to measure: Divide the costs of the goods sold by the cost of the average amount of inventory on hand.
Merchandise that’s sitting on your shelves or in the back room is money that you’re basically throwing away, which is why this KPI is so important. This metric shows how many times a company has sold and replaced inventory during a period and gives you the data necessary to decide how often you should be ordering and how to optimize the number of a certain product that should be on your shelves.
There’s no profit until the inventory is sold, so knowing how much you need — and how long it’s taking to sell — is key to success.
How to measure: (Actual Payroll Costs / Total Sales Revenue) x 100
This measures the percentage of gross revenue that is spent on payroll, which is often a difficult line to walk for many retailers. While you want to have enough employees to optimize sales, you also don’t want to hire employees you don’t really need.
Most retailers aim for their payroll percentage to be 15-30% of their overall revenue. When calculating this KPI, be sure to use your gross revenue, and not your net profit.
Customer retention rate
How to measure: (C1 – NC) / C2 x 100
C1 = Total number of customers at the end of the time period
NC = Number of new customers in that timeframe
C2 = Total number of customers at the start of the time period
This KPI is the percentage of customers who are repeat visitors versus first-time buyers. Having loyal and repeat customers is beneficial in multiple ways, namely because it’s six to seven times more expensive to acquire a new customer than it is to keep a current one. Ideally, you want the percentage of customers who visited your store in one year and then returned the following year to be as close to 100% as possible.
The way to retain customers is to offer stellar customer service and quality products that keep people coming back. In addition, offering customer loyalty programs and discounts to existing customers can increase the chance they’ll return.
It’s clear that monitoring this data is of the utmost importance. You can use customized dashboards created with Google Analytics or any other POS system to track metrics and create specialized reports based on your specific needs, but be sure to monitor KPIs in real time. This guarantees you can stay on top of important performance trends and productivity changes.
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