The Profitable Retailer: 10 Essential Retail Metrics - and 5 More to ConsiderRetail
Your brand has great products. Your employees provide outstanding service. Your customers come back for repeat business. You’re profitable - or so you think.
You’ll never really know if you’re profitable unless you have the right measurements. In addition to traditional measurements, new measurements reflect the changing retail landscape of online and in-store shopping patterns. Here are 10 essential metrics you need - and 5 more you should consider using.
THE 10 ESSENTIAL RETAIL METRICS
1. Total Sales
Without a doubt, there’s no more valuable number than Total Sales to reflect your performance. Retailers live and breathe by this number and today’s systems have made it easier to calculate.
Total Sales is the universal measurement that is included in enterprise-wide reporting and eventually shared publicly with shareholders and leadership. Making sure your systems can accurately calculate this number, by individual and across all locations, is critical.
Total Sales = Total dollar sales (may also include returns depending on your policy)
2. Sales by Category (Employee, Square Foot, Department)
Sales measurements become more meaningful if they measure a specific category. For instance:
Sales per Employee/Team - indicate team members who are high performing - or in need training.
Sales per Department - shows trends for specific departments (grocery, apparel, pet, etc).
Sales per Square Foot - helps optimize the space used to sell.
Sales by Category = (Total Sales) / (Number of employees, items sold in a department, or retail square footage)
3. Year over Year sales
Long popular, it is used to evaluate growth and performance over time, and may be performed daily, weekly, monthly or annually. It can be measured in total, by department, or other category.
Year over year sales can fluctuate due to weather patterns, holidays, demographic changes and more. Last year’s Thanksgiving holiday may be a busy shopping day this year, so year over year metrics may vary significantly.
Year over Year Sales = (Last Year’s Sales Total) vs. (This Year’s Sales Total)
When tracked over time, it can mean the customers are spending more (or less), and may take additional research to find out why.
An increasing transaction amount might occur if more higher priced goods are being sold in the past. It could also mean that third party shoppers (who tend to have higher grocery transactions) are now part of your customer mix.
Average Transaction = (Total Sales) / (Total Number of Transactions)
5. Cost of Goods Sold (COGS)
If you don’t know how much your products cost, you won’t know how much profit you’ve made.
The problem is that inventory prices change over time and must include changing purchase prices, discounts, freight and other factors that may change your costs.
Luckily, most accounting programs will automatically calculate COGS for you so you can easily keep track of it.
COGS = (Beginning Inventory) + (Purchases) - (Discounts & Vendor Returns) - (Ending Inventory)
6. Inventory Turnover
Your inventory investment will be wasted if it stays on your shelves. Inventory Turnover measures how quickly your products sell.
Low turnover items may be candidates for markdowns, vendor returns, or clearance sales. High turnover items can be closely monitored to prevent stockouts and for downward trends that indicate your “hot product” is cooling off.
Inventory Turnover = (Cost of Goods Sold) / (Average Inventory)
Shrink is a measure of the value you thought you had (as shown in your accounting records) versus what you actually have. Typically, you need a physical inventory to determine shrink, which is often performed annually.
The Total Shrink (the total value lost) and Shrink Percentage of Sales should be monitored. Shrink can be the result of customers (shoplifting), internal factors (employee theft or recording errors) or product spoilage (wasted, damaged, or discarded).
Total Shrink = (Amount in accounting records) - (amount physically counted)
Shrink Percentage = (Total Shrink) / (Total Sales)
8. Conversion Rate
Your conversion rate determines the percentage of customers who entered your location and purchased something. Loyalty programs, sales, and advertising are all used to improve conversion rates.
Foot traffic sensors make it easy to calculate the number of people who visit your store and your POS transactions will tell you how many customers made purchases.
Conversion Rate = (Paying Customers) / (Customer Foot Traffic)
9. Gross Margin
Gross Margin is the difference between what you sold and what you paid for it. Once you calculate your COGS, you can calculate Gross Margin.
Gross Margin is the amount left over to pay for operational expenses like labor, utilities, equipment and other costs to keep you in business.
Gross Margin = (Total Sales) - (COGS)
10. Net Income
Where Total Sales told you how much you made, Net Income shows how much you kept.
You’ll need to know your operations and overhead expenses like payroll, office supplies, utilities and other costs. Today’s accounting software makes it easy to track Net Income monitor trends over time.
Net Income = (Gross Margin) - (Overhead and General Expenses)
5 MORE METRICS YOU SHOULD CONSIDER
As retailers strive to keep up with customer demands, they now must offer a combination of both in-store and online sales and returns, which can result in increased expenses to your company. Unless you have the systems to track these trends, you may not understand the impact these trends have on your profits.
1. Loyalty Program Metrics
Retailers, convenience stores, and even the mom-and-pop pizza shop offer loyalty rewards to encourage repeat business. But if you don’t track your loyalty metrics, how do you know if they are working?
Understanding how much your loyalty program customers spend, what items they buy, and even what time of day they shop can have a significant impact on your profitability and your ability to keep them coming back.2. In-store vs. Online Sales and Returns
Year over year sales might be down, but are total geographic sales up? This could mean that your brand isn’t losing sales to competitors, but that your customers are staying home to shop. Widening your metrics to a larger geographic location will show sales trends that may go unnoticed.
Tracking BORIS (Buy Online Return In Store) metrics is essential. This is your opportunity to increase sales to a captive and loyal audience who may be willing to buy more.
3. Third Party Sales
Third party shoppers offer convenience to the customer, but their sales may go unnoticed if your systems cannot track their sales. Third party purchases typically have a higher basket size than in-store shoppers, but also require additional store labor to check-out and pack. Understanding your percentage of Third Party sales will help you identify profitability drivers.4. Sales Area Metrics
Customers may still be buying from your brand, but shop at locations close to work, their kid’s soccer field, or parents’ home. Expanding sales metrics out of the store and into a geographic footprint will provide a broader picture of your brand’s profitability.
5. Employee Turnover
Retailers are competing in a scarce labor market and have to do more to attract and retain employees. Measuring your employee turnover will help you stay competitive and improve your brand.
You can’t improve what you can’t measure. Using these measurements on a consistent basis will help you satisfy customers, improve operations, and be more profitable.
For more information on how to best utilize retail analytics to improve outcomes across the enterprise, download "The Complete Retail Data Analytics Guide" now.
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