With all the retail and analytics tools floating around, maybe you feel like you need to spend time on complicated formulas, excel tables, and data charts.
While there is certainly a time and place for all that complex math, there are a few key metrics that provide a simple, clear view of how your business is doing, and where your opportunities are. So, before you get overwhelmed with pivot tables, calculations, and headaches, start with these metrics.
1. Customer Traffic
Customers are the lifeblood of any store, and the amount of customers you have coming in is the most straightforward metric for your retail business. The math is also pretty simple: the more potential customers you get into your shop, the more potential is that they’ll leave money behind.
For brick-and-mortar retailers, you need to pay close attention to the number of visitors relative to your number of paying customers. You can use your point-of-sale data to measure the latter. The idea here is to set some benchmarks for how many customers you need to bring in to accomplish your goals, and to ensure you are steadily growing traffic over time.
If you’re looking at the e-commerce side of things, then measuring traffic is a bit simpler. Most e-commerce platforms provide some basic metrics as to how many visitors are coming to your website. Free software like Google Analytics can also be installed on your website to provide metrics, reports, and insights into your traffic patterns. Comparing visitors to purchases is the perfect segway into…
2. Conversion Rate
Your conversion rate is simple (and extremely important). Essentially, it’s how many of those store visitors actually buy something from you. It doesn’t matter how many people walk through the door if they never purchase. Of course we know that some visitors won’t buy anything, they’ll merely browse and leave empty-handed. The goal for retailers is to get that conversion rate as high as possible. The formula for the conversion rate percentage is:
Customer conversion ratio = # of transactions / Customer traffic x 100
Wondering what defines a “good” conversion rate? It really depends on the nature of your business and industry. If you’re selling clothing in a physical location, you may get 1 out of 4 customers to make a purchase (making for a 25% conversion rate). If you’re selling sandwiches, then most people who come in are likely going to purchase, so your conversion rate is much higher. If you’re selling high-ticket luxury items like cars, then your conversation rate will be much lower. For e-commerce, Bigcommerce states that the average conversion rate is between 1-2% for online purchases. Research your industry’s conversion rate, and then make your goal to excel above the industry average.
3. Average order value
Taking a deeper dive into data, you’ll want to know the value of your average sale. This one is also straightforward– How many dollars does your average customer spend at checkout? Here’s the formula:
Average sales order value = Total sales value / # of transactions
This metric is vital to understanding the productivity of your sales system. If you see your average order value is falling, it’s possible you are attracting less of the high-paying customers that you want. Alternatively, this could just mean that customers are visiting more frequently, and just paying less each time. Regardless, you need to keep an eye on this metric. Another metric that goes hand-in-hand with this one is the number of items per purchase. In general, if your average purchases are going up, the item count rises, too. But according to Erply CEO Kristjan Hiiemaa, “if your retail business keeps up good averages per purchase, but the number of items is rising, it means people are buying cheaper products in bulk.” Ideally, the item count is slower to rise than the average order value.
4. Gross margins
Generally, your gross margin is calculated as the selling price of an item, less the cost of goods sold. It’s necessary for any business to know how much it cost to acquire what they’re selling. Here’s how it works:
To calculate gross profit: Sales- Cost of Goods Sold
To calculate gross profit margin: Gross profit/sales
Your gross margin is what has to keep you afloat. It has to cover all the costs of production and selling the product, including things like salaries, taxes, rent and so on. Your margins also have to cover any incurred debts. When a retailer has lower margins, they typically have more conversions. For retailers like Costco, Walmart, and Amazon, this is the name of the game. They set their margins in the 10-20% range, which means they need thousands (or millions) of customers to actually make this work for them. Usually, the smaller the business the fewer items that are sold, which means higher margins are needed. Some specialty stores have margins from 100-500% markup, because that is what they require for success.
Today, customers are so used to discounts everywhere they go, they expect anywhere from 50%-70% discounts on everything. But be careful falling down the discount rabbithole. The rule of thumb is to set the gross margin high enough so you have plenty of room to cut back. Hopefully you’re doing well enough that you’ll have money left over afterwards. Advanced retail software can help you keep track of these types of calculations, minimizing the work required on a retailer’s part.
There are plenty of metrics a retailer can dive into if they want to learn about their performance and optimize for success. Step one is ensuring you know which metrics are most important to monitor. Step two is having the right tools in your toolkit to collect, analyze, and learn about your retail store data. To learn more about the only point-of-sale, analytics, and inventory tool made for Rug retailers, check out RM Pro.