As a retailer, you’re likely inundated with numbers every day. And those numbers always tell a story. Retail KPIs, or key performance indicators, can give you a bird’s-eye view of the health of your business. Whether you’re tracking an e-commerce shop or a brick-and-mortar, paying attention to KPIs will reveal where your business has been and where it’s going.
Getting familiar with retail KPIs empowers you to make better decisions for your business and to stay well-informed. Depending on the type of business you own, there are various KPIs you can use to track performance. To get you started, we’ll go over nine of the most commonly used ones.
What are retail KPIs?
A retail KPI is a quantifiable metric that can be used to show how your business is performing. Think of it as a report card for your business. Business owners closely review retail KPIs on a regular basis to determine whether they’re meeting their goals or falling behind.
Why are retail KPIs important?
A retail business can have countless moving parts, and without paying attention to retail KPIs, you’ll have no idea where your business might be faltering. Tracking KPIs can ensure you catch small problems before they become big problems. It can clue you in to important patterns in your business such as when you should hire additional staff, increase inventory, or liquidate stock with a sale.
How should you prioritize and measure retail KPIs?
The first step is understanding which KPIs matter the most for your business. There are hundreds of metrics you could measure, so it’s important to prioritize the right ones—only a handful might be applicable to your retail shop. For example, unless you have some type of subscription or membership model, you don’t need to worry about annual recurring revenue. And unless you’re doing a major public relations push, you likely aren’t looking at media impressions. Once you understand which KPIs are most relevant for your business, you can start properly analyzing the data.
Even small retail businesses can process hundreds of transactions a day, resulting in a mountain of retail KPIs to assess. Since retailers can’t go through every data point manually, many rely on software. Depending on your business, you should be able to use point-of-sale (POS) software to automate and streamline your data reporting. Tools like Shopify, Square, and Clover can not only help you make sales but also track finances and inventory.
What are examples of retail KPIs?
As we mentioned before, the KPIs that matter most can differ from business to business. It depends on your product niche, your business objectives, and your target audience. That said, here are nine popular retail KPIs that you’ll want to know.
1. Conversion rate
This is likely the most universal retail KPI that you should be familiar with, especially if you’re focused on the e-commerce space. Your conversion rate looks at the number of people who come to your website or walk into your store versus the number of people who actually make a purchase. In other words, how many browsers become customers?
This is represented as a percentage and calculated by taking the total number of conversions/purchases, dividing it by the number of visitors/interactions, and multiplying that number by 100. Retail businesses often treat the conversion rate as the north-star metric as it can indicate whether your branding, pricing, or merchandising strategy is effective.
2. Average transaction value
This retail KPI might also be referred to as an average order value, and it points to how much money a person spends on average when they make a transaction in your store or complete an online checkout. It’s calculated by taking the total value of your sales and dividing it by the number of transactions.
A high average order value can mean customers are choosing pricier items or simply buying more items in a single transaction. This KPI is a good one to watch because it can help you determine a merchandising strategy or pricing strategy. If you have a brick-and-mortar, maybe you need to put more impulse buys close to the cash register to drive up your average order value or, for an online store, offer free shipping once a shopper adds a certain amount to their cart.
How do you know if your marketing is effective or if people have an awareness of your brand? You monitor traffic, whether that be web traffic or foot traffic. For a digital storefront, you can measure this KPI through analytics software like Google Analytics, and for a physical storefront, you can analyze store video footage.
Traffic can tell you whether shoppers are finding your brand, and web traffic specifically can tell you how people are finding your brand. If an influencer shared a viral post featuring your product or if an email campaign resonated with people, web traffic can reveal that.
4. Customer retention
A customer who buys something once is good, but a customer who keeps coming back is much more valuable. Customer retention is a retail KPI that measures your ability to foster loyalty in your customers. This is the most important KPI when it comes to strengthening customer relationships. Ultimately, you don’t want one-off customers; you want to inspire a fan base around your brand. An increase in your retention rate can point to powerful branding, effective pricing, or just a really great product.
You can measure customer retention by taking the number of customers at the end of a time period, let’s say a month, and subtracting the number of new customers gained in that time. You then divide that number by the number of customers you had at the beginning of the month and multiply by 100. So if you had 1,000 customers at the end of a month and also started the month with 1,000, but 100 of those customers were new, then you have a retention rate of 90%.
5. Sales per square foot
Retailers use this KPI to measure the effectiveness of their retail space. It’s measured by dividing the total net sales by the square footage of your store.
Breaking down your sales into a per-foot metric can reveal which areas in your store are popular with shoppers and inform your merchandising strategy. If the sales per square foot are lower near a certain item, it’s an indication to either stock less of that item or experiment with moving it to another section of your store. A low number of sales per square foot for your overall store could mean your store layout isn’t optimized or that you have too large of a space for the merchandise you’re selling.
6. Return rate
Possibly just as important as how often customers buy your products, is how often customers keep your products. Your return rate is a percentage that represents how often customers return your products in exchange for a refund or a replacement.
Calculating return rate is pretty simple. You divide the amount of goods returned by the amount of goods sold. Naturally, you want this number to be as low as you can get it. A high return rate could indicate an inferior product or misleading marketing. The average return rate for the retail industry hovers just below 17%, according to the National Retail Federation.
7. Inventory turnover rate
Inventory turnover is the rate at which inventory turns over, or the rate at which customers buy your products. To calculate the inventory turnover ratio, take the cost of goods sold and divide it by the average inventory. A lower number means that a particular stock keeping unit, or SKU, is not selling quickly or is no longer in demand, while a higher number means you possibly aren’t keeping up with demand.
Retailers watch this KPI to know which items are moving quickly and which ones they should buy less inventory of or stop selling completely. Inventory turnover rate differs slightly from a sell-through rate, which is the amount of inventory sold versus the amount you bought from your wholesaler.
8. Net profit
When running any business, it’s critical to know if you’re profitable (or, if your retail business is new, how quickly you’re trending toward profitability). Your net profit is the best retail KPI for this.
Net profit is your sales revenue minus the cost of goods sold along with all the expenses of running your business such as taxes and operational overhead. You can look at net profit at the aggregate level to see if your brand is profitable, but it’s smart to dive deep and examine profit at the individual product level as well. Maybe your brand is currently not profitable, but you notice a certain product is extremely profitable. That could be your sign to double down on that product line.
You can look at net profit from year to year but can also look at it from month to month to discover the buying patterns of your customers. Net profit shouldn’t be confused with gross profit, which only subtracts the cost of goods from your revenue, not any other expenses.
9. Yearly growth
Year-over-year growth, sometimes shortened as YoY growth, looks at how a metric has progressed in the past 12 months. To calculate, you subtract the previous year’s revenue from the current year’s revenue to get the total change in revenue. You then divide that result by the previous year’s revenue and multiply by 100. For example, if you did $400,000 in sales this year but $250,000 last year, your YoY growth rate for sales is 60%. Year-over-year measurements can be applied to any retail KPI such as revenue, conversions, or traffic. Retailers use it to see how their business is expanding over time.
You can’t manage what you don’t measure. If you want to maintain or grow your retail business, it’s crucial to track your progress against goals. Retail KPIs help you do this. These common retail KPIs are a great place to start when it comes to understanding the performance of your retail business.
Are you a new retailer? Read more about Open with Faire and learn how to apply for up to $20,000, with 60-day payment terms, to stock your new shop.