If you run a retail business, you know that it’s a competitive endeavor. Are you looking for ways to help your brick-and-mortar business maximize profits and prosper in the long term? Key performance indicators (KPIs) — values that gauge your progress toward specific business goals — can help. They provide you with valuable, quantitative information you can use to improve your operations and maintain a competitive advantage. While you can choose from hundreds of retail KPIs, these three options are among the most reliable indicators of how your business is doing.
1) Retail Store KPI: Store Traffic
Brick-and-mortar businesses like yours depend heavily on foot traffic. The more people that enter your store, the more opportunities you have to sell. That’s why one of the top KPIs you can measure is also one of the most important – the number of potential customers that come through the doors. Why do you need to track traffic? It tells you how well you’re attracting customers into your business through marketing, signage, advertising, and word of mouth. You can also correlate your store traffic levels with other KPIs, such as your gross sales. If sales increase as foot traffic increases, you can focus your marketing budget on getting more people in the door. If not, you might need to invest in internal changes — you could offer new products to meet customer needs, try a different store layout, or use a more effective customer service strategy.
Are you trying to track seasonal shifts in customer demand? It’s helpful to measure your store traffic figures year-over-year. Depending on the products you sell, you might notice trends in foot traffic. If you sell resort wear, for example, you might notice that foot traffic increases in January and February as customers prepare for their spring vacations. With this information, you can boost sales by loading up on new inventory before the traffic increases.
Comparing one month to the same month in the previous year can also give you a quick indication of whether or not your business is growing. Likewise, month-to-month declines in traffic can be an early warning sign that you need to make some changes to keep customers returning.
2) Average Customer Spend
As a retail business owner, you know that it’s cheaper to keep an existing customer than recruit a new one. One of the most effective ways to increase your sales is for your existing customers to buy more. If that’s your goal, an “average customer spend” KPI can help you track your progress. This measure tells you how much your customers spend on average each time they buy from you. Calculating that number can help you create a baseline understanding of your customers’ spending habits. Then, as you try upselling and new marketing techniques to get your customers to buy more, you can see how the average spend changes in response.
Imagine that an average customer spends $20 per purchase. The next month, you ask cashiers to upsell customers on a specific product at the register. After that month, your average customer spend is still $20. This indicates that your customers aren’t responding to upselling, so trying a new strategy is probably in order. You could also offer sales training for your staff to help them encourage customers to buy more. When your average spend increases, it’s a good sign that you’re on the right track.
Are you looking to identify star sales employees? Try analyzing average customer spend by shift. If customers spend more when a specific worker is on duty, it tells you that employee is using great sales techniques. In that case, you could learn from the employee’s tactics or ask them to help the rest of your staff improve.
3) Profit Margins
Your net profit margin is the amount of revenue you have left over after you’ve paid all your expenses. In other words, it tells you how profitable your store is. That’s why your profit margin is one of the most important measures of retail performance, and one of the most useful KPIs to track your company’s financial health. If your profit margin is increasing, it’s a great sign that you’re choosing inventory and bringing in customers effectively.
But what happens if your profit margin KPI starts to decline? When this happens, you can compare this KPI with other sales metrics to get to the root of the problem — beginning with your gross margin and operating margin.
- Gross margin: This metric tells you how your selling costs are affecting your profit. To calculate it, use this equation: (Sales revenue – Cost of selling your products) / Sales revenue
- Operating margin: This margin tells you how much profit you’re getting for every dollar in sales you make. To calculate operating margin, divide your operating profit by your net sales.
When your profit margin drops, it’s often because of a change in one of these two metrics. Imagine that your profit margin KPI drops. When you look at your gross margin, it’s similar to previous months. However, your operating margin has dropped considerably. This might indicate that your store has taken on higher overhead expenses. To fix the problem, you can analyze your expenses and try to find areas to cut costs.
What happens when your gross margin drops, but your operating margin stays the same? Since gross margin is related to the costs you pay to sell your goods, your inventory is probably the source of the problem. A supplier might have raised prices. In that situation, you can improve your gross margin (and, consequently, your net profit margin KPI) by finding a new supplier or eliminating the high-cost product from your store. If your net profit margin KPI starts to rise, you know you’ve solved the problem.
Sometimes, changes in your retail business can feel mysterious. By tracking these KPIs, you can spot problems early, find ways to fix them, and keep your store profitable. Need help tracking your store’s data or finding information for your KPIs? Using an accounting system, such as QuickBooks Online, you can generate a Profit and Loss statement automatically. Learn how today.