What is KPI in Retail? How to Improve KPIs in Retail?
Are you a retail store owner wondering how you could measure the success or failure of your ongoing business venture? Then you’re on the right track. Else, your retail might be in grave danger and you might not even be aware of it. Yes, that’s what a KPI does. It tells you how your business is performing so you can know what the next step is before things start turning south.
Understanding and optimising your Key Performance Indicators (KPIs) is essential if you want to stay competitive and drive higher profits. It is, in fact, a secret recipe for growth in the retail industry.
Before we get into the nitty-gritty of how we can improve KPIs for retail businesses, let's first paint a picture of what they actually are.
And that's not all – we'll also introduce you to a game-changing tool that can supercharge your efforts: A POS System. But let’s first answer the most common question.
What is KPI in Retail?
At its core, a KPI, or Key Performance Indicator, is a quantifiable metric that helps you measure how well your business is performing in relation to its goals. Think of KPIs as your retail compass – they guide you by providing insights into various aspects of your business. From sales and customer satisfaction to inventory management and profitability, KPIs measure it all.
Here is the list of the most important KPIs that you need to keep track of for your retail business:
- Sales per Square Foot
- Gross Margin Return on Investment (GMROI)
- Foot Traffic and Digital Traffic
- Sales Conversion Rate
- Average Transaction Value (ATV)
- Inventory Turnover Rate
- Customer Acquisition Cost (CAC)
- Customer Retention Rate
What are Different Types of KPIs in Retail?
Sales per Square Foot
It is the amount of revenue generated for every square foot of retail space that you own. It's a fantastic indicator of how effectively your store's layout and product placement are enticing customers to make purchases.
The formula to calculate Sales per Square Foot (SPSF) is as follows:
Sales per square foot = Total sales revenue/Total square footage of selling space
A high SPSF suggests that your store design is optimised for sales and that customers are finding items quicker. However, low SPSF means that your products might not be placed in the most efficient way in the store.
Gross Margin Return on Investment (GMROI)
GMROI is the calculation of how efficiently you're using your inventory to generate profits.
The formula to calculate GMROI is as follows:
GMROI = Gross Profit/Average Inventory Cost
A high GMROI indicates that you're making a healthy profit relative to your inventory investment. Conversely, a low GMROI means that you’re making a bad investment in your inventory items.
Foot Traffic and Digital Traffic
Foot traffic measures the number of visitors that visit your physical store. Whereas, digital traffic counts the online visitors to your website, social media profile, mobile app or any other online platform. Monitoring both types of traffic is essential as it unravels the overall interest in your store and its online presence. Higher foot and digital traffic can lead to increased sales opportunities.
Sales Conversion Rate
Sales Conversion Rate is the percentage of visitors who actually make a purchase. A higher conversion rate indicates that your store is doing a great job at turning potential customers into buyers. Improving this rate often involves enhancing customer service, product visibility, and store ambience.
The formula to calculate Sales Conversion Rate is as follows:
Sales Conversion Rate = Total Number of Sales/Total Qualified Leads
Meanwhile, read our article on tactics to increase conversions on retail grocery store for in-depth knowledge.
Average Transaction Value (ATV)
ATV refers to the average amount customers spend in a single transaction. Tracking this KPI is vital because increasing the ATV without necessarily increasing foot traffic directly contributes to higher revenue. Techniques like upselling and cross-selling can be used to increase the Average Transaction Value of your retail store.
The formula to calculate ATV is as follows:
Average Transaction Value = Total Revenue Generated in X Time Period/Total Number of Transactions in X Time Period
Inventory Turnover Rate
The inventory turnover rate or ratio shows how quickly you sell your inventory and replace it with new stock. A high turnover rate indicates that your inventory management is efficient, helping you avoid overstocking or understocking.
The formula to calculate Inventory Turnover Ratio is as follows:
Inventory Turnover Ratio = Net Sales/Average inventory at selling price
Customer Acquisition Cost (CAC)
Customer Acquisition Cost is the cost it took you to gain a new customer. A low CAC means that your marketing and advertising efforts are efficient in attracting the right target audience. However, a high CAC reveals that your marketing might not be working well to attract potential customers.
The formula to calculate Customer Acquisition Cost is as follows:
Customer Acquisition Cost = Total Marketing Costs related to the acquisition/Total customers acquired
Customer Retention Rate
A happy, returning customer is a goldmine for any retail business. Customer Retention Rate measures how well your store retains its customers over time. A higher retention rate implies that your store offers products and experiences that customers enjoy and find valuable. Retaining customers is often more cost-effective than acquiring new ones.
The formula to calculate Customer Retention Rate is as follows:
Customer Retention Rate = (No. of Customers at the end of x time period - No. of customers acquired in x time period)/No. of customers at the start of the x time period*100%
How to Improve KPI in Retail Business?
Follow these 5 tips to improve KPI in your retail business:
Set Clear Goals
It is crucial to define clear and attainable goals for each KPI that you want to track. This approach provides your team with a distinct destination to strive towards.
Analyse Data
Regularly analyse your sales data, customer feedback, and other relevant information to identify trends and areas for improvement. These insights reveal emerging patterns, consumer preferences, and potential areas where you could improve KPIs and beat your competitors.
Train Your Staff
It is also important to provide your staff with the training that they need to drive sales and improve customer experiences. Create a workforce that not only meets KPI targets but also adapts seamlessly to evolving market dynamics. For example, a well-trained sales associate can effectively upsell complementary products, thereby increasing the average transaction value.
Optimise Inventory
Implement effective inventory management practices to ensure products are readily available without tying up unnecessary capital. For instance, if you notice that a particular item consistently flies off the shelves, adjusting your inventory levels accordingly prevents stockouts. This helps in optimising inventory without overburdening your storage space.
Use a Retail POS System
A modern POS system like POSApt can work wonders for your retail business. It not only helps you to easily achieve all the above-mentioned tips but also provides more options to improve KPIs. In summary, it streamlines operations, improves accuracy, and provides real-time insights into your KPIs, helping you make informed decisions. Plus, it doesn’t even cost you a dollar to give our POS system for Retail businesses a try - we’re giving you a Free 30-Day Trial. Sign up Today.
Conclusion
Now that you know what KPIs are and how you can improve them to increase your retail sales, it’s time to put this knowledge into practice. Happy Selling!
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FAQs
What is the Most Important KPI in Retail?
Sales Conversion Rate and Customer Retention Rate are the most important KPIs for common retail businesses. However, the importance of KPIs can vary based on your business goals and the size of your business as well.
What Retail KPI Metrics Should I Track the Most?
The Retail KPI Metrics that you should be tracking the most are Average Transaction Value and Customer Acquisition Cost. They are easy to calculate and work best for every retailer. Moreover, each KPI mentioned above has its own significance and impact on your retail business. Go through them one by one and find ones that resonate with your business goals.