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As a retailer, youâre likely inundated with numbers every day. And those numbers always tell a story. Retail KPIs, or key performance indicators, can give you a birdâs-eye view of the health of your business. Whether youâre tracking an e-commerce shop or a brick-and-mortar, paying attention to KPIs will reveal where your business has been and where itâs 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, weâll 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 theyâre 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, youâll 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 itâs important to prioritize the right onesâonly a handful might be applicable to your retail shop. For example, unless you have some type of subscription or membership model, you donât need to worry about annual recurring revenue. And unless youâre doing a major public relations push, you likely arenât 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 canât 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.
Essential retail KPIs to track
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 youâll want to know.
1. Conversion rate
This is likely the most universal retail KPI that you should be familiar with, especially if youâre 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. Itâs 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.
3. Traffic
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 donât 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, letâs 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. Itâs 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, itâs 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 isnât optimized or that you have too large of a space for the merchandise youâre 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 arenât 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, itâs critical to know if youâre profitable (or, if your retail business is new, how quickly youâre 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 itâs 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 shouldnât 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 yearâs revenue from the current yearâs revenue to get the total change in revenue. You then divide that result by the previous yearâs 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.
Retail KPI examples: which metric should you use?
If you want to boost sales:
If your organization wants to boost sales, use a KPI like average transaction value. There are lots of ways to go about this, but you might consider stocking up on popular point-of-purchase gifts by the register, increasing the average value of the goods you sell (or picking up a few more splurge items), offering gift-wrapping services at an additional charge, or setting up promotions like buy two, get one 50% off. Any or all of these options should incentivize shoppers to spend a little extra each time they visit your store.
If you want to increase customer satisfaction, loyalty, and retention:
If youâre laser-focused on the customer, try a KPI surrounding a new loyalty program, like loyalty program sign-ups. Once you create a program, there are a multitude of channels to get the word out. In-store, give shoppers the opportunity to sign up at the register and offer a small discount to get them in the door. Be sure to promote on your website, through social media channels, and in your newsletters.
If you want to make sure your brick-and-mortar space is cost-effective:
To see if the physical space of your retail shop is worth the mortgage or rental fee, use the KPI sales per square foot. If youâre very efficient, maybe itâs time to expand; if youâre losing money due to skyrocketing rent, maybe itâs time to cut your losses and move to an e-commerce model.
Take a good look at your store. Where can you improve the set-up? Is there an area where you could add a bookshelf with accessories without over-cluttering the space? Could you set up more mannequins to model outfits? Make a few changes, take note, and see where you net out. You may just discover that thereâs a lot you can do to increase incremental sales, no matter the size of your shop.
Final thoughts
You canât manage what you donât measure. If you want to maintain or grow your retail business, itâs 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.
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