The metrics that matter
Your KPIs provide vital indicators to help you build on known strengths and weaknesses, manage by exception and get a pulse on your true return on your investment. However, there are so many metrics that it can be difficult to know which ones to focus on. Retail can be particularly overwhelming in this regard as there is an almost endless amount of industry specific metrics that have emerged. Footfall numbers, conversion rates, average basket size, stock turnover ratios – the list is endless.
Whilst they are all useful, there is a need to work within a hierarchy of KPIs. While many retail metrics can provide more microscopic insights once you have identified an investigation area, the key metrics are the ones that will give you a quick but comprehensive health check on whether your business is going in the right or wrong direction over time.
A ‘top down’ approach
The best place to start is with a picture of your overall business, then work down to identify good, average and poor performance areas for further attention and analysis. To provide full flexibility in your analytics, you will want to be able to split your metrics:
- Across the entire business
- By store/channel (including your eCommerce store to compare its performance)
- By product category
- By product line
- By individual product
- By customer segment.
From here, you can delve into different comparative analyses such as budget vs. actual, periodic (e.g. month over month, previous year), store vs. store and product vs. product results. Your ability to generate suitable reporting will depend upon having the right systems to capture, organise and analyse data. This often requires extensive planning to configure your data structure in the right way so you can work to the level of granularity you require.
Primary metrics: To see the wood for the trees
Ideally, you will have access to dynamic and real-time dashboards and reports for each of these primary metrics and be able to drill down into different levels for each of them on a daily, weekly, monthly, quarterly and yearly basis.
Set 1: Profit, or ‘Is the juice worth the squeeze?’
Your margins (and therefore profit) are a central focus of most businesses. These affect what your take-home salary may be and what can be invested back into the business. Metrics help to find the ideal balance for product margins and identify any unproductive categories.
Monitoring your turnover gives you a strong idea of demand per category or product line, and also clarifies the effectiveness of your sales and marketing strategies.
Having real-time awareness of your costs is imperative. Pay attention to any unexpected variances to forecasted costs, and you’ll be able to identify and nip any wastage in the bud.
- Profitability, or Return on Investment
While absolute profit expressed in dollar terms is valuable, you also need to pay attention to ROI as a percentage of the funds invested. Your profitability metrics could identify smaller-cost areas that are highly profitable, which with some additional investment could be major contributors to your returns.
- Customer Lifetime Value and Cost to Acquire:
What are your customers’ repeat visits worth, and what does it cost to acquire them? Focusing on who brings you the most revenue and why will enable you to make the most of your retail potential.
Set 2: Cash flow, or ‘Can the engine keep on running?’
With so much of a retail business involving laybys, credit purchases and so on, you will need to have a clear idea of your cash flow at any one time. It’s important to have an awareness of incoming and outgoing cash in a general sense, but also to regularly monitor at the lower levels of the hierarchy. Viewing cash flow by product lines, products or customer segments, for example, will tell you what contribution (or drain) they are making to your overall flow of funds.
Secondary metrics: Identifying root causes
Once you have found an area that is showing an area of risk or opportunity, the next step is to dig deeper into the causes. This is where further metrics can come in use, including:
- Average order value/basket size
- Conversion rates (visitors vs. buyers)
- Frequency of visit
- Stock turnover ratios
- Costs including labour and materials spent in each business area, such as sourcing, inventory, sales, marketing, service and fulfilment.
Reliable reporting depends on reliable systems
Many retailers find out the hard way that their software systems don’t have the necessary data configuration settings or reporting functionality to track these essential metrics and KPIs. Are you able to get what you need at the click of a button? For ideas and examples of how easy and insightful these kinds of metrics reports should be, arrange a free consultation with one of our retail experts today.