You are probably aware that retail is one of the most hectic industries. It deals with staffing, inventory, conversion, delivery, and much more. That is why it’s very important that all of those activities are tracked properly.
That is where key performance indicators (KPIs) come into play.
Read: The Complete Guide to Retail Operations
By tracking inventory turnover, conversion rate, customer retention rate and other retail KPIs, you ensure that you know how close you are to your business goal, make informed decisions and make sure that you know which areas you can improve upon.
The question is: What indicators are right for you? In this article we’ll walk you through the importance of retail KPIs, their types and which ones you should focus on.
Key takeaways:
Retail KPIs are essential tools that help measure progress toward business goals, identify areas for improvement, and guide informed decision-making in a complex industry
Key sales KPIs include sales per square foot, conversion rate, and average transaction value, which together reveal how efficiently your store generates revenue and how effective are your sales strategies
Inventory management KPIs like inventory turnover and stockout rate help maintain optimal stock levels, reduce overstocking or stockouts, and ensure products are available to meet customer demand
Customer experience KPIs such as customer retention rate, product return rate, and foot traffic provide insights into customer loyalty, satisfaction, and the effectiveness of marketing or store layout
Profitability KPIs, including gross margin return on investment (GMROI) and net profit, are crucial for understanding the financial health of your retail business and ensuring that inventory investments yield positive returns
Choosing the right KPIs depends on your business’s specific goals, priorities, and available data, making it vital to regularly review and align your KPI tracking with both short- and long-term objectives
What Is a Retail KPI?
A key performance indicator (KPI) is an important tool used to measure the performance and success of organizations in achieving their goals and objectives. In the retail industry they can be especially important because of the sheer amount of information and data being collected daily.
These performance metrics are used in many ways, such as comparing a firm’s present performance with its past or evaluating its competitiveness in the industry, eventually leading to strategic methods for improvement.
While focusing on daily retail operations, it’s easy to lose sight of business goals and their progression. Retail KPIs are often used as a benchmark to identify opportunities for improvement and innovation.
Types of Retail KPIs Worth Tracking
As retail deals with many different aspects of running a business, it’s no surprise that one can easily get lost in the sea of incoming information. That’s why we divided retail KPIs into sections according to which part of the business they track and affect the most.
Sales Performance KPIs
Sales are the main source of revenue, therefore they should be one of the first metrics you should track. Here are a few you should look out for:
Sales per square foot: How many purchases completed per square foot of a store. This metric reveals how well you’re using store space and how efficient is the store layout. This metric is particularly important for managers of multi-location businesses, because they see which location brings the most revenue relative to the size of the store.
Conversion rate: Not every visitor turns out to be a customer. Conversion rate is a percentage of visitors that complete a purchase. If conversion rate is constantly low it indicates that there is a problem with layout, customer satisfaction or potential stockouts.
Average Transaction Value: ATV represents the average amount of money spent per each customer. It is important for pricing strategy as it shows if people are buying more expensive products or higher volume of products. This metric is often used in ecommerce – marketers want to increase ATV by making free shipping just a bit higher than what is the current average transaction.
Inventory Management KPIs
Inventory turnover: A metric that measures how much inventory you use up in a given period of time. A low number indicates too much inventory which can lead to overstocking and therefore storage full of slow-moving products, while high number might mean that you cannot keep up with the demand, leading to frequent stockouts and dissatisfied customers.
Stockout rate: This measure shows how often products in demand are unavailable for purchase. It also shows how well business manages fast-moving products and efficiency of their retail inventory system.If not taken into account stockouts can quickly lead to customer dissatisfaction and loss in sales.
Customer Experience KPIs
Customer retention rate: Customer retention rate shows in relation how many customers business has retained in relation to new ones coming in. It is an important metric as keeping existing customers is more cost-effective and less time consuming than customer acquisition. In retail, customer retention rate averages at only 63% showing a lack of loyalty among customers. Retaining customers is from five to 25 times cheaper than acquiring new ones, making this indicator important for any business.
Product Return Rate: The projected returns were projected to reach $890 billion in 2024. Return rate in retail was as high as 16.9%. If you are experiencing a high product return rate you should first check that descriptions match with products on the website and that product quality is aligned with customer expectations.
Foot traffic: shows how many people entered the store. This metric gets the most value when combined with conversion rate KPI. Then it can be a good indicator of sales because generally more foot traffic means more revenue. This can be particularly important to see if campaigns and promotions attracted more customers than usual.
Profitability KPIs
Gross margin return on investment (GMROI): Buying inventory is one of if not the biggest cost in retail. To see if investment is profitable you should track GMROI. It displays how much money you made off a product.
For example if you buy $10 000 worth of products and it sells for $30 000, your GMROI is 3.0 – meaning – for every $1 you spend on inventory, you earn $3 in profit before other costs like rent or salaries. If your GMROI drops below 1.0, it means you are not making profit on that product and should probably remove it from the shelves.
Net profit: is a key metric when it comes to profitability. It shows how much money is left after all expenses have been paid. It helps avoid overspending and alerts in case of constant net deficits.
Operations KPIs
Employee turnover: Measures how many employees leave the organization in a specific period of time – most frequently in a year. The retail industry has been experiencing high turnover for years – often higher than 60%. Tracking this metric allows you to recognize the problem and react quickly and accordingly.
Shrinkage rate: This KPI measures a difference between reported inventory value and actual inventory value. This deviation happens due to factors like theft, damage, miscounts or other reasons. A good inventory system can greatly reduce shrinkage minimizing costs.
How to Decide Which KPIs Matter For Your Business
Even though all KPIs that we covered are important and provide valuable insights into the profitability, inventory management and customer behaviour, you should always choose what KPIs you want to track more closely.
To decide which ones are right for you you need to ask yourself the following questions:
For example, as a 30-location grocery store, your short-term goals could be increasing same-store sales and reducing inventory shrinkage, while your long-term goals could be expanding to 50 locations. If you were already tracking total sales per square foot, inventory turnover and product return rate, you can ask yourself how the product return rate relates to your goals. For chain businesses it’s important to prioritize KPIs such as inventory turnover and GMROI. When choosing and tracking these KPIs, it’s crucial to use already existing and high-quality data – ensuring reliable and accurate insights.
Retail KPIs are metrics used to help you see if your business is going in the right direction – fulfilling goals and staying profitable. Tracking them will allow you to see things more objectively, make more informed business decisions and recognize opportunities for improvement before it’s too late. In retail, where margins are tight and competition is fierce, selecting the right KPIs transforms raw data into actionable insights.
