Most modern POS platforms come with an array of out-of-the-box reports, which is an excellent place for you to start with your retail analytics. These metrics are usually calculated in real time as transactions occur at your store. Reports, charts, comparisons, trends, and insights are available 24×7 at the click of a button. It is, however, easy to get lost in this plethora of data and lose sight of the very objective of analytics – optimization, and improvement. Questions that naturally arise are – should you focus on all the metrics or just a select few? In the case of the latter, how do you go about selecting the right parameters? Or should you follow the industry best practices or focus on the metrics that the competition tracks?
The answer is closer to you than you think – your store operations. Your retail and category strategy should dictate which metrics to focus on. You may take cues from best practices in your industry, but your business objectives and goals will help you lock down the parameters for your store. And as to the number of metrics to track, experts say that retailers should start with 5 – 7 metrics, and include more as the business grows and goals change.
To help you maneuver through this terra incognita – unchartered territory – we have come up with a blog series, dedicated to retail analytics. In the first part of the series, we bring to you four metrics that are worth monitoring for any retail business.
A. Sales per sq. foot
Sales per sq. foot is an indication of the health of your retail store. It is calculated by dividing total in-store revenue over a month or a year into square feet of retail selling space.
Sales per sq. foot = total revenue/total selling space in sq. feet.
This formula excludes the non-selling space of the store, such as employee lounges, bathrooms, inventory, etc.
It is a good idea to set goals for this metric at the earliest. However, it may prove difficult to benchmark this metric for your specific industry. Referencing publications from research bodies, data from trade association bodies and journals, and annual reports of your competitors will help you get an idea of what benchmarks you can look at.
Now that you have an idea of where you want to be in terms of your sales per sq. foot, you can work towards improving the metric to achieve your goal. Since your store layout directly impacts sales per sq. foot, focus on optimizing your selling space and visual merchandising first. A quick look at other metrics such as foot traffic and conversion rate will give you insights on how and where to place your products for maximum exposure. Take a look at product sales to identify products that are not selling and replace them with other products or categories in your shop floor. You can also experiment with pricing and promotional strategies to move the needle in sales per sq. foot.
B. Average Purchase Value
Average purchase value is a measure of the average shopper spend at your store. It is a pretty straightforward metric to calculate, and most POS machines give you this metric automatically when you close for the day. The formula for this metric is:
Total revenue/number of transactions, within a specific period.
Average purchase value is indicative of the productivity of your sales system and how much your customers are spending. A high average purchase value means people are either buying more expensive items or buying more items per transaction. Lower values indicate issues with pricing or sales tactics like upselling/cross-selling.
It makes sense to look at items per purchase in conjunction with the average transaction value to get better insights into the performance of your sales strategy. An increase in items per purchase with little or no change in average purchase value means your customers are buying cheaper items more. On the other hand, an increase in average purchase value with little, no change, or drop in items per purchase means your recent campaign is working well, or your employees are getting better at upselling and cross-selling. However, there is an upper cap to average purchase value, and it is quite impossible to increase it beyond a point without increasing the items per purchase. The ideal scenario is that both the average purchase value and items per purchase should increase, but the latter should rise at a slower pace than the former.
C. Gross Margin Return on Investment (GMROI)
Simply put, GMROI is the return on your inventory investment. According to experts, about 80% of any retail’s asset is inventory, thereby making it the largest investment for the business. Thus, it makes absolute sense to calculate how much are you making on the money spent on stock. To calculate GMROI use this easy formula:
Gross profit/average inventory, typically calculated for a year.
GMROI helps you take stock of your current operations and plan for the future. GMROI numbers are instrumental in business planning, formulating pricing strategy, payment optimization, etc. Retailers also use GMROI calculations to manage stock refreshes and suppliers, and change products, categories, or brands.
D. Shrinkage
Shrinkage or shrink refers to the loss of inventory due to human and administrative causes such as errors, product damage, employee and customer theft, supplier fraud, etc. To calculate shrinkage, use the following formula:
Original inventory value – sold inventory value
Shrinkage is a common phenomenon in all retail businesses. While it is impossible to eliminate shrinkage, you must keep an eye on it as high shrink rates can eat away at your profits. Experts say that retailers should strive to keep the shrink rate at under 2%.
There are some practical ways to keep shrinkage in check. Taking proactive steps in instilling employee accountability, reducing employee turnover, and conducting timely audits and employee training programs will go a long way to minimize shrinkage.
As with any business analytics, retail metrics shouldn’t be viewed in isolation. Metrics must be analyzed in conjunction with other parameters which measure various aspects of your store and its operations. When viewed together, these metrics will help you drill down to the bottom of your store operations, get actionable insights, identify trends and problem areas that need attention. After all, analytics is the fuel that powers your growth engine.