ou are probably well aware that KPIs and metrics can significantly impact the success of your business. Key Performance Indicators, or KPIs, are performance-linked metrics that indicate how well or poorly your business is doing. They help identify the gap between set and achieved targets, offering a clear picture of your retail business's health. Understanding and measuring the right retail KPIs is crucial because they guide your strategic decisions and help you focus on areas needing improvement.
With hundreds of KPIs catering to different industries and their unique requirements, it can be overwhelming to identify which ones to focus on. Each metric provides vital insights into your business, but as a retailer, which key retail KPIs should you prioritize to achieve your set targets and goals?
For instance, brick-and-mortar retail KPIs will differ from those relevant to an online e-commerce store or a dropshipping business. So, how do you determine which KPIs are most relevant to your retail business? And once you’ve identified them, how do you measure them effectively? This is where Qalara steps in to help you out. In this comprehensive blog, we will delve into the important retail KPIs and provide detailed instructions on how to measure them to optimize your business performance. Whether you are running a physical store, an online shop, or a dropshipping venture, our insights will help you focus on the right metrics to drive growth and success.
Understanding retail KPIs
A discerning retailer always bases their business decisions on a thorough analysis of the relevant KPIs. By studying these key metrics, they can learn from past outcomes and make well-informed decisions for the future. The retail model is particularly fascinating because, despite the shift from brick-and-mortar stores to online shopping, the fundamental metrics for gauging consumer interest remain largely consistent, with some adjustments for context.
For instance, the conversion rate is a critical retail KPI. In an online store, it measures how many website visitors become paying customers. In a physical store, it assesses how many visitors who enter the store end up making a purchase. Similarly, customer retention rates, average transaction value, and inventory turnover are essential KPIs that provide valuable insights regardless of the retail format.
Understanding and measuring these marketing & sales-related KPIs can significantly impact your ability to attract and retain customers, optimize operations, and drive sales. Let’s delve into analyzing some vital retail KPIs to help you navigate your business towards sustained growth and success.
Definition of retail KPIs
Simply put, retail KPIs are measurable metrics that can determine your business performance.
These KPIs can focus on various areas such as marketing, sales, inventory, engagement, or customer experience. For example, marketing-centric KPIs like website traffic and customer acquisition cost help you understand the effectiveness of your marketing campaigns. Sales-related KPIs, such as sales per square foot and average transaction value, reveal how well your products are selling. Customer experience KPIs, like customer satisfaction scores and return rates, highlight how well you are meeting customer expectations. Ultimately, these metrics help you optimize your business strategy to drive growth.
The role of KPIs in business strategy and performance tracking
In a 2024 survey among senior-level marketing professionals, about 64% indicated they monitored their businesses’ marketing and sales pipelines as key performance metrics. However, less than half of them reported including Customer Lifetime Value among their significant KPIs. While this may reflect a general finding, as a retailer, it is crucial to analyze your niche and prioritize the top retail KPIs most relevant to your business. For instance, if you don’t have an online presence, tracking media impressions might not be necessary. Instead, focus on metrics like foot traffic, sales per square foot, and inventory turnover. If you run an e-commerce store, KPIs such as cart abandonment rate, website conversion rate, and average order value would be more pertinent.
Think of retail KPIs as milestones on the path to achieving your business goals. Without this roadmap, you risk losing direction and may find yourself repeating the same mistakes or wandering aimlessly. By identifying and monitoring the right KPIs, you can make informed decisions that drive your business forward. Hence, strategize better!
How to track retail KPIs
There is an abundance of digital tools and physical methods available to effectively measure retail KPIs and metrics. For online retail stores, tracking metrics has never been easier. With powerful data collection systems like Shopify, Salesforce, HubSpot, Google Analytics, and WooCommerce, you can effortlessly monitor your sales pipeline, finances, and other critical insights. Additionally, tools such as Microsoft Power BI, Tableau, and Klaviyo provide advanced data visualization and customer engagement analytics.
For brick-and-mortar stores, technologies like POS systems (e.g., Square, Lightspeed, and Clover), foot traffic counters, and customer feedback kiosks can provide valuable data. These tools help you keep track of sales performance, inventory levels, and customer satisfaction in real-time. Let’s delve into some effective methods and tools for tracking your retail progress and ensuring your business thrives.
Point of Sale (POS) systems
For any retail setup aiming to streamline sales and inventory management, investing in a Point-of-Sale (POS) system is essential. Not only does a POS system simplify day-to-day operations, but it also makes tracking KPIs for a retail store more straightforward.
An electronic POS system integrates both software and hardware to perform various functions: registering purchases, printing receipts, checking customers out, scanning barcodes, generating QR codes, and storing cash. Beyond these front-end operations, a POS terminal offers robust back-end support by measuring sales, tracking inventory, and facilitating fund transfers.
Additionally, with the surge in cashless payments, the number of POS systems has skyrocketed. Since 2012, the prevalence of digital payment terminals has grown significantly, with nearly 2.3 million units in operation in the UK alone by 2022. This dramatic increase underscores the critical role of POS systems in modern retail, making them indispensable tools for efficiently managing sales and customer transactions.
Some of the best and most trusted POS systems in the market include Square Point of Sale, Toast, OVVI, Shopify Point of Sale, and Aloha. These systems can track key retail KPIs such as sales per employee, average transaction value, and inventory turnover rate. By providing real-time data and detailed analytics, POS systems enable retailers to make informed decisions for the future.
Also read: The art of effectively using AI in retail
Customer Relationship Management (CRM) software
As the name suggests, a Customer Relationship Management (CRM) system helps you manage your customers and prospects more effectively. It serves as a central repository for customer information and details. Thanks to modern technological advancements and the rise of AI-driven solutions, many CRM systems now offer features that go far beyond the basics, significantly reducing workload and enhancing efficiency. The CRM software market, projected to reach $89.30 billion in 2024, underscores the growing importance of managing customer relationships effectively.
In addition to contact and lead management, these software solutions provide sales forecasting, marketing analytics and automation, campaign management, email integration, customer support automation, and third-party integrations. These capabilities make CRMs invaluable tools for tracking crucial retail KPIs, such as customer acquisition cost (CAC), customer lifetime value (CLV), sales conversion rates, and customer satisfaction scores. By leveraging these advanced features, retailers can gain deeper insights into their performance metrics, streamline operations, and make more informed business decisions.
Some tools you can consider include Freshsales, Pipedrive, Hubspot, Insightly, Bigin, and Zendesk Sell. These platforms offer a range of functionalities tailored to meet the diverse needs of retail businesses.
Inventory management systems
As a retailer, external factors such as cycle time and lead time emerge as crucial KPIs worth tracking. These metrics determine the efficiency of your manufacturing processes, production timelines, and can significantly impact your overall operations. Moreover, before listing and selling your inventory, effective management is essential to track and control stock levels. An inventory management system precisely serves this purpose, monitoring your stock throughout the supply chain—from sourcing and production to final sales. It is reported that retailers with more than 60,000 products can reduce the labor costs of manual stock audits by over USD 70,000 per year with an automated inventory management system.
Investing in comprehensive inventory management solutions not only provides greater inventory visibility but also ensures seamless integration with other softwares, enhances workflow efficiency, and enables accurate financial reporting. These systems help track vital retail KPIs such as inventory turnover, stockout rates, and order accuracy. By leveraging tools like SafetyCulture, Ordoro, inFlow Inventory, PartKeepr, Sortly, Shopify, and more, you can streamline your inventory processes, optimize stock levels, and ultimately drive better business performance.
Also read: 5 hacks to sell excess inventory
Data analytics tools
Retail data is a powerful asset that, when harnessed effectively, can significantly benefit your business. By using this vast reservoir of information, you can extract valuable insights and make informed decisions to enhance your retail operations. Data analytics tools in retail enable you to identify trends, monitor market shifts, conduct competitor analysis, understand consumer habits, track sales patterns, and streamline your operations.
By using these tools, you can measure and track crucial retail KPIs such as customer retention rates, sales growth, and inventory turnover. Tools like Acumen by G & Co., Looker, NetSuite, Sisense, Tableau, and Qlik help you manage and analyze the deluge of data, providing you with actionable insights to drive your business forward. These analytics platforms not only offer robust data visualization and reporting capabilities but also integrate seamlessly with your existing systems, ensuring you have a comprehensive view of your performance metrics and can optimize your strategies accordingly.
Also read: 9 new-age & efficient B2C advertising tools
Key retail KPIs to track
Sales-centric retail KPIs
1. Sales per Square Foot: An immensely valuable metric for brick-and-mortar retailers, this KPI measures which area of your store is the hotspot for customer activity and sales conversions. It measures the revenue generated per square foot of retail space. This helps assess the efficiency of your store layout and space utilization and lets you make the right merchandising decisions.
Formula: Sales per Square Foot = Total Sales / Total Square Feet of Sales Space
2. Average Transaction Value (ATV) or Average Order Value: This retail KPI indicates the average amount spent by customers per transaction. This can be at your physical store or after an online checkout. ATV helps in understanding customer purchasing behavior and effectiveness of sales strategies. Accordingly, it can help you optimize your pricing strategy.
Formula: Average Transaction Value (ATV) = Total Revenue / Number of Transactions
3. Gross Margin Return on Investment (GMROI): GMROI measures the profitability of inventory by comparing gross margin to the cost of inventory. It helps determine if inventory investments are yielding sufficient returns. Through this retail KPI, you can find out how much profit is generated from every dollar invested in your inventory purchases.
Formula: GMROI = Gross Margin / Average Inventory Cost
So, if a store has a gross margin of $40,000 and an average inventory cost of $20,000, the GMROI is $40,000 / $20,000 = 2.0, meaning $2 is earned for every $1 invested in inventory.
4. Foot Traffic or Web Traffic: Foot traffic measures the number of customers entering a store. It is crucial for understanding customer flow and planning marketing strategies to increase store visits. But how does one measure this retail KPI? Traditional methods of calculation such as tally or clicker counting are still popularly used to measure foot traffic. You can alternatively rely on visual analytics via the security cameras and footage. For an online store, this translates to web traffic that can be measured using analytics tools like Google Analytics.
Formula: Foot Traffic = Total Number of Customers Entering the Store
5. Sales per Employee: This metric calculates the average sales generated by each employee. For a retail setting that heavily depends on its employees’ capacity to convert leads, this ratio helps evaluate staff effectiveness. The higher the number, the better the staff productivity.
Formula: Sales per Employee = Total Annual Sales / Number of Employees
6. Sales Conversion Rates: A crucial KPI for both store owners and e-commerce professionals, the sales conversion rate reveals how many visitors turn into customers. This metric tracks the percentage of browsers who complete a purchase, offering insight into the effectiveness of your sales strategies and customer service.
Formula: Sales Conversion Rate = (Total Number of Sales / Total Number of Visitors) x 100
7. Sales Growth or YoY Growth: Sales growth tracks the increase or decrease in sales over a specific period. It is vital for understanding business progress and setting future targets.
Formula: Sales Growth = [(Current Period Sales – Previous Period Sales) / Previous Period Sales] x 100
This formula can also be applied to measure other retail KPIs like conversion rates or foot traffic, helping retailers gauge how their business is evolving over time.
Marketing-centric retail KPIs
1. Customer Acquisition Cost (CAC): This retail metric measures the total cost of acquiring a new customer, including expenses on marketing, sales, and any other resources. It essentially tells you how much you are spending to ‘acquire.’
Formula: CAC = Total Marketing & Sales Expenses / Number of New Customers Acquired
Hence, if a retailer spends $10,000 on marketing and sales in a month and acquires 100 new customers, the CAC would be $100 per customer.
2. Customer Retention Rates: Customer Retention Rate tracks the percentage of customers who continue to do business with you over a specific period, highlighting customer loyalty and the success of your retention strategies.
Retention Rate = ((Customers at End of Period – New Customers During Period) / Customers at Start of Period) x 100
Example: If a retailer starts with 1,000 customers, gains 200 new ones, and ends the period with 1,050 customers, the retention rate would be 85% [(1,050 – 200) / 1,000] x 100.
Customer-centric retail KPIs
1. Net Promoter Score (NPS): NPS measures customer loyalty and satisfaction by asking a simple question: “How likely are you to recommend our product/service to a friend or colleague?” Customers respond on a scale of 0-10, and based on their responses, they are categorized as Promoters (9-10), Passives (7-8), or Detractors (0-6).
Formula: NPS = Percentage of Promoters − Percentage of Detractors
2. Customer Lifetime Value (CLV): CLV predicts the total revenue a business can expect from a single customer throughout their relationship.
Formula: CLV = (Average Purchase Value × Purchase Frequency) × Customer Lifespan
Meaning, if a customer spends $50 per purchase, buys twice a year, and remains a customer for 5 years, the CLV would be $500.
3. Customer Satisfaction Scores: CSAT measures how satisfied customers are with a product, service, or interaction. After a purchase or service, customers rate their satisfaction on a scale (e.g., 1-5).
Formula: CSAT = (Total Positive Responses / Total Responses) × 100
So, if 80 out of 100 customers rate their satisfaction as 4 or 5, the CSAT score is 80%.
4. Return Rates: Return Rate tracks the percentage of products returned by customers after purchase, indicating issues with product quality or customer satisfaction.
Formula: Return Rate = (Total Returned Items / Total Sold Items) × 100
Thus, if 50 items are returned out of 500 sold, the Return Rate would be 10%.
5. Churn Rate: Churn Rate measures the percentage of customers who stop doing business with a company over a specific period. This metric is key to understanding customer retention.
Formula: Churn Rate = (Customers Lost During Period / Total Customers at Start of Period) × 100
If you started the month with 100 customers and lost 5, your Churn Rate would be 5%.
6. Customer Effort Score (CES): CES gauges the ease with which customers can interact, complete a transaction or resolve an issue. After an interaction, customers are asked to rate the effort required on a scale (e.g., 1-7). The average of these scores provides the CES.
Formula: CES = (Sum of All Effort Scores / Total Responses)
If 100 customers give you a sum of 700 as a score, the CES would be 7.
7. Average Resolution Time: This metric measures the average time it takes for your customer service team to resolve a customer issue or inquiry. This will determine the efficiency of your customer support.
Formula: Resolution Time = (Total Time Taken to Resolve All Issues / Total Number of Issues Resolved)
If your support team resolves 20 issues in 200 hours, the average Resolution Time is 10 hours per issue.
Inventory-related retail KPIs
1. Inventory Turnover: Inventory Turnover measures how often a company sells and replenishes its inventory over a specific period, indicating optimum or excess inventory.
Formula: Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory at Selling Price
If a retailer has a COGS of $500,000 and an average inventory of $100,000, the Inventory Turnover would be 5, meaning the inventory is sold and replaced 5 times a year.
2. Stockout Rate: This tracks the percentage of items that are out of stock when customers attempt to purchase them. Stockout can occur due to inaccurate forecasting, supplier delays, inefficient stock management, and other logistical issues.
Formula: Stockout Rate = (Number of Stockouts / Total Number of Order Items) × 100
If there were 50 stockouts out of 1,000 order items, the Stockout Rate would be 5%.
3. Days Sales of Inventory (DSI): DSI indicates the average number of days it takes for a retailer to convert inventory into revenue. It informs you about your company’s efficiency when it comes to clearing stock.
Formula: DSI = (Average Inventory / Cost of Goods Sold (COGS)) × 365
If the average inventory is $150,000 and the COGS is $600,000, the DSI would be 91.25 days, meaning it takes approximately 91 days to sell the inventory.
4. Order Accuracy: Order Accuracy measures the percentage of orders that are fulfilled correctly without errors, indicating the precision of inventory management and order processing.
Formula: Order Accuracy = (Number of Accurate Orders / Total Number of Orders) × 100
If 950 out of 1,000 orders are accurate, the Order Accuracy rate would be 95%.
E-commerce retail KPIs
1. Cart Abandonment Rate: This retail KPI measures the percentage of online shoppers who added items to their virtual cart but abandoned it and left the website without completing the purchase. This metric is crucial for identifying friction points in the checkout process.
Formula: Cart Abandonment Rate = 1 – (Total Number of Purchases / Total Number of Shopping Carts Created) × 100
If you had 100 purchases and 400 carts were created, your cart abandonment rate will be 75%.
2. Website Conversion Rate: Website Conversion Rate tracks the percentage of website visitors who complete a desired action, such as making a purchase, signing up for a newsletter, or downloading an app. It reflects the effectiveness of your website in turning browsers into customers.
Formula: Website Conversion Rate = (Number of Conversions / Total Number of Visitors) × 100
If your website had 10,000 visitors and 500 of them made a purchase, the Website Conversion Rate would be 5%, indicating that 5% of visitors became customers.
Operational retail KPIs
1. Employee Turnover Rate: This figure highlights the percentage of employees who leave your business within a certain period. This retail KPI is important for understanding staff retention and the associated costs of hiring and training new employees. Watch out for a high turnover rate as it may indicate issues with job satisfaction or management practices.
Formula: Employee Turnover Rate = (Number of Employees Who Left During a Period / Average Number of Employees During the Same Period) × 100
So, if 15 employees leave out of an average of 150 employees over a year, the Employee Turnover Rate would be 10%.
2. Retail Shrinkage: This refers to the loss of inventory due to theft, shoplifting, stock counting errors, damage, or delivery errors. It is a critical retail KPI for identifying potential losses and improving inventory management.
Formula: Shrinkage = (Recorded Inventory − Actual Inventory / Recorded Inventory) × 100
If your recorded inventory is $100,000 and the actual inventory is $95,000, the Shrinkage rate would be 5%. This means you’re losing 5% of your inventory value to shrinkage, emphasizing a need for tighter security and inventory controls.
3. Order Fulfillment Time: Order Fulfillment Time measures the average time it takes to process and deliver an order to the customer after it has been placed. This KPI is crucial for gauging customer satisfaction and detecting issues in your supply chain and logistics.
Formula: Order Fulfillment Time = Total Time Taken to Fulfill Orders / Total Number of Orders Fulfilled
If your store processes 200 orders in a total of 4,000 hours, the average Order Fulfillment Time would be 20 hours per order.
Conclusion
Effectively measuring and optimizing your retail KPIs is crucial for driving growth and maintaining a competitive edge in the retail industry. By focusing on the right metrics, you can make informed decisions that enhance customer experience, improve sales, and boost overall business performance. Remember, the key to success lies in continuous monitoring and adjusting your strategies based on the insights gained from these KPIs. Qalara is here to support you on this journey. Ready to elevate your retail business? Explore our range of lifestyle and decor products to meet your sourcing needs today!
~ Written by Gauri S
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