November 26, 2014

Top 10 KPIs in Retail

Retail is one of the most competitive industries with sharp focus on increasing sales and retaining more customers. In order for a retail organization to stay on top, they need to know everything about their business. While there are hundreds of key performance indicators (KPIs) that retailers keep track of, the following KPIs stand out in terms of the competitive advantage they provide and help you continue to deliver superior performance.

Sales & Gross Margin

The most important performance indicator for a retail store is the sales generated over a period of time. Sales can be compared across locations, retail stores, product categories, etc. to identify performance trends and formulate marketing strategies and offers.

Gross margin refers to gross profits expressed as a percentage of sales. This is an important indicator of a company’s financial performance. Gross margin is also important for determining the markup percentage for products.

Sale per Square Foot

This KPI measures how much average sale you generate from each square foot of area in the retail store. Sales per Square Foot can provide important insights in terms of the effectiveness of the store layout and the performance of sales personnel. By comparing the KPI across different stores, large retail chains identify which store layouts are more effective and then plan to redesign other store layouts to improve sales.

Average Customer Spend

This KPI involves calculating the average amount customers are spending during each purchase. You can also compare this with the average number of units purchased per transaction (UPT). Average purchase value can vary depending on the type of retail store. For example, an electronics retail store will generally have a higher average spend per transaction and a lower UPT compared to an apparel store which is likely to have a lower average spend but higher units per transactions. An analysis of average customer spend can help retailers in segmenting their customers and plan their sales and marketing efforts.

Stock Turnover Rate

Inventory turnover refers to the number of times the average inventory of a product is sold in a year. It is an indicator of how quickly you are able to sell your inventory. If a retailer’s inventory turnover ratio goes down from 10 to 6, it indicates that the inventory is not turning over as quickly as it had in the past. This also indicates that the retailer now has excess inventory which

Sell Through Rate

Sell through rate is calculated as the ratio of the number of units sold in a period and the beginning on-hand inventory for the period. Sell through % tells us how much of inventory we are able to sell in a given period. It can be important especially while planning for seasonal merchandize as you want to sell out all your seasonal merchandize before the season ends. Note that Sell Through Rate is the opposite of Stock to Sales ratio

It is important to note that just knowing a KPI is not enough. In order to take decisions or corrective actions, one must look at multiple KPIs in the right context. For example, assume that you’re analysing profit margins by product and realize that Product A is unprofitable, i.e., it cost is more compared to its sale value. This information may lead you to decide to stop selling this product. However, you may instead analyse this in more detail and find that you buy the product from two distributers and one of them is overcharging you for the product. With this new information, you can now either negotiate new rates with the supplier.

To conclude, it is important for every retailers to identify and track the top KPIs for their business and identify people within the organizations who are responsible for these KPIs.

BI Solutions, Retail Analytics