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. 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
The retail industry can be an extremely competitive one, and your main priority is to grow your sales. However, you also have to make sure that you optimize your inventory management. Here are the top 4 KPIs to track your inventory.
1. Inventory Turnover
Inventory turnover measures the number of times that a business sells and reorders its stock over a specific period of time.
Tracking inventory turnover is essential to determine the optimal level of inventory that should be on hand. If your inventory turnover is slow, you are not selling your product fast enough and risk carrying dead stock.
If your inventory turnover is high, you may not be purchasing enough. This may mean stock shortages which could upset your customers and cause issues with customer retention.
2. Sell-through rate
Sell-through reflects how fast your company is turning over its inventory during a specific time period. Sell through rate is expressed as a percentage of the number of goods sold compared to your starting amount of inventory.
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 the appropriate purchasing decisions. As a business, you want to strive to have a high sell-through rate. A high sell-through rate indicates that your business is able to quickly move merchandise and doesn’t have a lot of excess stock taking up space in inventory.
Inventory shrinkage occurs when there is less of a specific item in stock than what is on the inventory records. Shrinkage may be due to various factors, including theft, vendor errors, or cash register mistakes.
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 looks at how well your business can turn your inventory into cash, over and above the initial cost of that inventory.
Measuring your business’s GMROI can give significant insight into how much money your inventory brings in over how much it cost.
Tracking your sales is essential for your retail business to determine where it sits compared to its competitors and what methods should be taken to grow your business in the future. Here are the top 6 KPIs to track your sales.
5. Conversion Rate
The conversion rate is the number of people who visit your store compared to the number of people who actually make a purchase.
Measuring 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 are up to your customer’s expectations.
6. Sales Per Square Foot
Sales per square foot take into consideration your business’s total sales in relation to how large your retail space is.
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.
By knowing your average transaction value, you get a better understanding of your customer's spending habits. It can 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 customer base. 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 per transaction.
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 different categories. This can give you a better sense of what products are usually bought together and will give insight into what products complement each other and could be used to upsell or cross-sell.
A large basket size is a good indicator that your store is able to successfully fulfill many of your customer’s 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 can help you come up with better upselling and cross-selling strategies.
9. Customer Retention
Customer retention helps to measure customer loyalty. It looks at how well your business can retain its customers over a specific period of time.
Customer retention is necessary because the longer you can hold on to a customer, the more times they will come back and visit 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. In order 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.
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.