This is the second post in our three-part series on bookkeeping for retail businesses. Our first post offers a comprehensive bookkeeping guide for retailers. The third post in this series looks at what to consider when hiring a bookkeeper for your retail business and why outsourced bookkeeping may be the most viable solution for retailers.
Key performance indicators, also known as KPIs, are important metrics that help you track how your retail business is performing and where it is headed. There are many retail KPIs you can follow, covering different aspects of 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 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 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 inventory levels, minimize stockouts, reduce holding costs, and 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.
Cost of Goods Sold (COGS) refers to the direct costs incurred in producing the goods or services that a company sells during a specific period. This includes expenses for raw materials, direct labour, and manufacturing overhead directly tied to the production process of a good. COGS is subtracted from a company's revenues to determine its gross profit, providing insight into the core profitability of the business operations. Understanding COGS helps in pricing products, managing inventory, and improving operational efficiency.
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 customer disappointment and cause customer retention issues. Increasing inventory to meet demand is the solution to very strong inventory turnover.
Retail businesses can optimize their inventory to maintain a healthy inventory turnover ratio by implementing strategies such as 1) accurate demand forecasting to predict future sales; 2) utilizing inventory management systems for real-time tracking and automation; 3) adopting just-in-time (JIT) inventory to reduce holding costs; 4) optimizing their product mix based on sales performance; reducing lead times through supply chain improvements; 5) performing regular inventory audits to ensure accuracy; 6) clearing out excess or obsolete stock through promotions or returns; 7) enhancing supplier collaboration for better replenishment; 8) monitoring and adjusting inventory turnover ratios; 9) applying economic order quantity (EOQ) calculations for cost-effective ordering; 10) embracing technology and automation like RFID and AI analytics; and 11) considering dropshipping or cross-docking to minimize storage.
2. Sell-through rate
Sell-through reflects how fast your company turns 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. Inventory 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.
To reduce shrinkage, retailers can implement a multifaceted approach that addresses its primary causes: theft (both external and internal), administrative errors, supplier fraud, and damage. Enhancing security measures is essential; this includes:
- Installing surveillance cameras throughout the store,
- Using electronic article surveillance (EAS) systems with security tags on merchandise,
- Employing security personnel or loss prevention officers to monitor suspicious activities.
- Implementing strict access controls to stockrooms and using lockers for employee belongings can further deter internal theft.
Improving inventory management systems is another critical step.
- Adopting advanced technologies like barcode scanning or radio-frequency identification (RFID) can automate inventory tracking, reduce manual entry errors, and provide real-time visibility of stock levels.
- Regular inventory audits and cycle counts help identify discrepancies promptly, allowing businesses to investigate and address issues before they escalate.
- Training employees on proper inventory handling procedures, reporting protocols for damaged or misplaced items, and fostering a culture of accountability can significantly minimize administrative errors and internal shrinkage.
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, reflecting the ability to turn inventory into cash above the cost of goods sold.
GMROI helps businesses determine the effectiveness of their inventory management and pricing strategies. Measuring your business’s GMROI can give significant insight into how much money your inventory brings in above its cost. Here are some tactics retailers can use to improve GMROI:
- Identifying High-Performing Products
Analyze Product-Level GMROI: Evaluate GMROI at the product or category level to identify items that generate the highest returns.
Focus on Profitable Inventory: Allocate more shelf space and resources to high-GMROI products to maximize profitability.
Discontinue Low-Performers: Reduce or eliminate inventory investment in products with low GMROI to free up capital. - Optimizing Inventory Levels
Adjust Stock Quantities: Use GMROI data to maintain optimal inventory levels, avoiding overstocking or understocking.
Improve Inventory Turnover: Aim for a higher turnover of goods without sacrificing margins, enhancing cash flow.
Reduce Holding Costs: Minimizing excess inventory lowers storage costs and reduces the risk of obsolescence. - Refining Pricing Strategies
Analyze Margin Impact: Understand how pricing changes affect gross margins and GMROI.
Implement Dynamic Pricing: Adjust prices based on demand, competition, and inventory levels to maximize returns.
Promote High-GMROI Items: Use targeted promotions to boost sales of profitable products. - Enhancing Product Assortment
Optimize Product Mix: Curate inventory to include products with the best balance of sales velocity and profitability.
Introduce New Products Strategically: Assess potential GMROI before adding new items to the inventory.
Seasonal Adjustments: Adapt the product lineup based on seasonal GMROI trends to capitalize on peak sales periods. - Improving Supplier Relationships
Negotiate Better Terms: Use GMROI insights to negotiate lower purchase prices or bulk discounts, improving margins.
Collaborative Planning: Work with suppliers on demand forecasting to ensure timely replenishment and reduce stockouts.
Vendor Performance Evaluation: Assess suppliers based on how their products contribute to GMROI, strengthening the supply chain. - Setting Performance Benchmarks
Establish GMROI Targets: Set specific GMROI goals for departments or product categories.
Monitor Regularly: Track GMROI over time to identify trends and respond promptly to declines.
Incentivize Staff: Align employee performance metrics with GMROI objectives to encourage efficient inventory management. - Balancing Sales and Inventory Turnover
Optimize Turnover Rates: Aim for a turnover rate that ensures fresh inventory while maintaining healthy margins.
Prevent Stockouts: Maintain sufficient stock of high-GMROI items to avoid lost sales.
Manage Markdown Strategies: Use discounts strategically to improve turnover without eroding overall profitability. - Enhancing Marketing and Promotion Efforts
Targeted Promotions: Focus marketing efforts on products with high GMROI to amplify returns.
Bundle Offerings: Create bundles that include high and low GMROI items to move inventory effectively.
Customer Insights: Use GMROI data to understand customer preferences and tailor marketing messages.
15 Must-Track Metrics & KPIs for Nonprofit Success
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. Retailers can improve their conversion rate with the following marketing and customer service tactics:
- Enhance Store Layout and Visual Merchandising
Optimize Store Design: Create a logical flow that guides customers through key product areas.
Eye-Catching Displays: Use attractive window and in-store displays to draw attention to products.
Product Placement: Position high-demand and impulse items strategically to encourage purchases.
Regular Refreshes: Update displays frequently to showcase new arrivals and keep the store looking fresh. - Improve Customer Service
Staff Training: Educate employees on products, sales techniques, and customer interaction.
Personalized Assistance: Encourage staff to engage with customers, offering tailored recommendations.
Adequate Staffing: Ensure enough staff are available, especially during peak hours, to assist customers promptly.
Employee Attitude: Promote a friendly and helpful environment to make customers feel valued. - Optimize Inventory Management
Stock Availability: Keep popular items in stock to prevent missed sales opportunities.
Real-Time Inventory Systems: Use technology to track inventory levels accurately.
Efficient Reordering: Implement automatic reordering processes to replenish stock quickly.
Variety and Options: Offer a wide range of products to meet diverse customer preferences. - Streamline the Checkout Process
Reduce Wait Times: Implement efficient checkout procedures to minimize lines.
Multiple Payment Options: Accept various payment methods, including mobile payments.
Express Lanes: Offer quick checkout lanes for customers with fewer items. - Utilize Promotions and Incentives
Limited-Time Offers: Create a sense of urgency with time-bound discounts.
Loyalty Programs: Reward repeat customers with points, discounts, or exclusive deals.
Bundling Products: Encourage higher sales by offering product bundles at a discounted rate.
Cross-Selling and Upselling: Train staff to suggest complementary products. - Enhance Store Ambiance
Lighting: Use appropriate lighting to highlight products and create a welcoming atmosphere.
Music: Play background music that aligns with your brand and appeals to your target audience.
Cleanliness and Comfort: Maintain a clean store with comfortable temperatures and pleasant scents.
Seating Areas: Provide rest areas for customers to relax, encouraging longer store visits. - Provide Product Information and Education
Clear Signage and Labels: Ensure all products have visible prices and descriptions.
Educational Materials: Offer brochures, guides, or demos to inform customers about products.
Staff Expertise: Position employees as knowledgeable advisors who can answer questions. - Optimize Pricing Strategies
Competitive Pricing: Regularly review and adjust prices to remain competitive in the market.
Transparent Pricing: Avoid hidden costs to build trust with customers.
Price Matching: Offer to match competitors' prices when feasible.
Value Proposition: Emphasize the quality and benefits of products to justify pricing. - Reduce Barriers to Purchase
Flexible Return Policies: Offer hassle-free returns to reduce purchase hesitation.
Try Before You Buy: Allow customers to test or try products in-store.
Financing Options: Provide payment plans or financing for higher-priced items.
Simplify Navigation: Make it easy for customers to find what they are looking for. - Enhance Online and Offline Integration
Omnichannel Experience: Provide a seamless shopping experience across all channels.
Click-and-Collect Services: Allow customers to buy online and pick up in-store.
Online Inventory Visibility: Show in-store stock levels on your website.
Digital Loyalty Programs: Integrate loyalty rewards across online and physical platforms.
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 require 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 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 better understand 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. It refers to the percentage of customers 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 new customers from the number of customers at the ending period. 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 Calculator 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.