Key performance indicators, also known as KPIs, are important metrics that can help you track how your retail business is performing and where it is headed in the future. There are many retail KPIs that you can follow, covering different aspects of a business' performance, including inventory management, customer retention, sales volumes, and many others. Some of these measurements will track the success of your business as a whole, while others can be used to track the success of particular programs or campaigns.
While you don't have to track every performance indicator, choosing a few that are important for your retail business's priorities will help give you better insight and allow you to make more strategic business decisions.
Retail Inventory KPIs
Retail Inventory KPIs measure and evaluate the efficiency and effectiveness of a retailer's inventory management processes. They include metrics like inventory turnover ratio and sell-through rate. They provide insights into inventory levels, sales performance, and operational efficiency. By monitoring these KPIs, retailers can optimize their inventory levels, minimize stockouts, reduce holding costs, and ultimately improve profitability. Effective inventory management is essential for ensuring that the right products are available to meet customer demand while minimizing excess inventory and its costs. Here are the top four KPIs for tracking your inventory.
1. Inventory Turnover Ratio
Inventory turnover measures the number of times that a business sells and reorders its stock over a specific period. It provides a ratio of the cost of goods sold (COGS) divided by the average inventory value over a specified period. Using sales instead of COGS will inflate the results for the inventory turnover ratio. Average inventory, in this instance, does not include items lost to damage or shrinkage.
Tracking inventory turnover is essential to determining the optimal level of inventory that should be on hand. If your inventory turnover is slow, you are not selling product fast enough and risk carrying obsolete or dead stock. It may also mean that you are overstocked and carry too much inventory. Optimizing sales or marketing strategy or reducing inventory to meet demand are solutions for weak inventory turnover.
If your inventory turnover is high, you may not be purchasing enough product. Stock shortages could result in disappointment from your customers and cause issues with customer retention. Increasing inventory to meet demand is the solution to very strong inventory turnover.
2. Sell-through rate
Sell-through reflects how fast your company is turning over its inventory during a specific period. The sell-through rate is expressed as a percentage of the number of goods sold compared to the starting amount of inventory. Specifically, it is the number of units sold in a specified period divided by the number of units in the starting inventory. Multiply by 100 to convert this result into a percentage. Periods can be weeks, months, quarters, or annual.
Keeping a close eye on your sell-through rate will go a long way in helping you evaluate your merchandise performance. It will also allow you to determine how quickly a product is selling to make decisions about purchasing frequency. As a business, you want to strive to have a high sell-through rate. A high sell-through rate indicates that your business can quickly move merchandise and doesn’t have a lot of excess stock taking up space in inventory. Good sell-through rates vary by industry, but 40% to 80% are frequent measures depending on the industry. High-value, low-volume products (luxury items) will have lower sell-through rates than high-volume, low-value products (fast moving consumer goods).
3. Shrinkage
Inventory shrinkage occurs when less of a specific item is in stock than what is on the inventory records. Shrinkage may be due to several factors, including product theft, vendor errors, administrative inventory errors, cashier errors, or damage. Shrinking is the difference between actual inventory and recorded inventory over a specified period. The formula for calculating shrinking involves subtracting actual (physical) inventory from recorded (book) inventory.
Tracking your shrinkage is an excellent way to reduce inventory discrepancies. It will help you better manage your inventory and will keep you vigilant in reducing and preventing theft and administration errors, which can cost your business a lot of money.
4. Gross Margin Return on Investment (GMROI)
Gross margin return on investment (GMROI) is a profitability ratio. It measures how well your business can turn your inventory into cash over and above the initial cost of that inventory. GMROI is calculated by dividing gross profit by average inventory cost.
Measuring your business’s GMROI can give significant insight into how much money your inventory brings in above its cost.
Sales KPIs
Tracking sales is essential for your retail business to determine its position compared to its competitors and what methods should be used to grow it in the future. Sales KPIs track the performance of a retailer's sales activities. These KPIs include average basket size, average transaction value, and conversion rate. Sales KPIs provide insights into sales performance, customer behaviour, and the effectiveness of marketing and sales strategies, helping retailers make data-driven decisions to drive revenue and profitability. Here are the top six KPIs for tracking sales.
5. Retail Conversion Rate
The retail or sales conversion rate is the number of people who visit your store compared to the number of people who make a purchase. The retail conversion rate is the ratio of the number of customers who made a purchase divided by the number of visitors to your store in a specified period.
Measuring your sales conversion rate can give your business valuable insight into how well your store attracts visitors and converts them into actual customers. You can track your conversion rate over time to understand whether your store layout, checkout process, promotions, and product lines meet your customers' expectations.
6. Sales Per Square Foot
Sales per square foot consider your business’s total sales relative to the size of your retail space. The ratio is calculated by dividing total sales in a specific period by the total area of the retail space (square feet or square meters). Low sales per square foot requires optimizing sales or marketing strategy to increase revenue or reducing the size of the retail space by using a smaller location (moving to a smaller space or sharing the location with another retailer who is not a competitor).
Tracking this metric gives important information on how well your business uses its store space to make sales. The higher the sales per square foot value, the better.
7. Average Transaction Value
Also known as ATV, the average transaction value refers to the average amount that a customer spends at your establishment in one transaction. ATV is calculated by dividing the value of total sales by the number of transactions. ATV is an important metric for retailers because it provides insights into customer behaviour and overall sales performance. High ATV means that customers are spending more per transaction, which is a sign of strong sales.
By knowing your average transaction value, you get a better understanding of your customer's spending habits. Tracking ATV over time can reveal trends in customer behaviour and also provide insight into your pricing strategy. If your average transaction value is low, it may mean that your pricing strategy is not in line with your customers' needs or preferences. You may need to reconsider your product pricing or devise ways to increase upsells, cross-sells, create bundles, or offer incentives that entice your customers to make larger purchases.
8. Basket Size / Items Per Transaction
Simply speaking, basket size measures the average number of items that a customer purchases in a single transaction. It is calculated by dividing the total number of items sold by the total number of customers in a specific period.
This metric will vary based on the type of product sold. For example, the average basket size for shoe stores is 1.32, but the average basket size for cosmetic stores is 2.57. Tracking your business’s basket size is an excellent idea, especially if your store sells products from multiple categories. This can give you a better sense of what products are usually bought together, give insight into what products complement each other, and could be used to upsell or cross-sell. Comparing average basket size before and after a promotional campaign can also help retailers evaluate the effectiveness of promotions and marketing campaigns.
Large basket size is a good indicator that your store can successfully fulfill customer needs and can also show how well a specific multi-buy promotion is performing. This KPI can help you gain insight into how your customers spend their money and devise better upselling and cross-selling strategies.
9. Customer Retention
Customer retention helps measure customer loyalty. It measures how well your business can retain its customers over a specific period. Basically, it refers to the percentage of customers that a business successfully retains over a specific period. It is a vital metric for measuring customer loyalty and the effectiveness of a retailer's efforts at building customer loyalty through marketing, product, customer service, and pricing strategies. Customer retention is calculated by subtracting the number of customers at the ending period from the number of new customers. The difference is then divided by the number of customers at the beginning period.
Customer retention is necessary because the longer you can keep a customer, the more likely they will return to your sale and make more purchases.
10. Gross Profit and Net Profit
Gross profit is the total of your net sales minus the cost of goods sold.
Gross profit does not consider any other expenses, such as overhead, administrative, or marketing costs. To determine your total profit after all of these expenses have been paid, you need to calculate Net Profit.
Tracking your gross and net profit amounts will help you create the most accurate budgets and give you important insight into your business's pricing strategies.
Final Thoughts
Measuring and tracking your retail KPIs will allow you to measure just how well your business is performing and whether you are headed in the right direction to meet your future goals. They can give you a better understanding of where your business is at the current time and where it's headed in the future.
Bookkeeping is key to generating useful data for your KPIs. If you need help managing your books and tracking KPIs, reach out to our Enkel team. Our team of professionals can help your retail business better understand your finances and give you the knowledge that you need to succeed.
