Today, we see some retailers strained beyond repair, closing stores while putting more pressure on suppliers to retain some level of margin and profitability. It’s clear that pricing and inventory strategies must go beyond a guessing game or reactive price matching to compete.
The growth in omnichannel intensifies the need to continually fine-tune product pricing, which products to carry and at what levels, to make the tweaks needed to stay in business.
Thankfully, the scientific approach has evolved and retailers can quickly determine where they stand in core operational areas. Here are six Key Performance Indicators (KPIs) that retailers should be able to extract specific data for and know at any time.
It’s imperative that these numbers are checked frequently. Doing so quarterly or annually, may result in an unpleasant surprise.
#1 Units Per Transaction:
The formula = (total units sold / total transactions)
Units Per Transaction (UPT) averages the number of SKUs or units that customers purchase in any given transaction. In an omnichannel environment, tracking UPT by channel – online, in-store, Amazon, and eBay – is key to managing inventory, pricing, and promotions, while measuring sales activity and consumer engagement. If your UPT is flat or decreasing for your ecommerce store, you’ll want to delve into the customer journey to find ways to improve product recommendations or upselling tactics.
Having regular dialogues with sales staff is a smart practice for your in-store operations. Associates share first-hand customer experiences so management can mentor staff on upselling techniques while contributing to the increase of UPT.
#2 Average Purchase Value or Average Order Value:
The formula = (total sales / total transactions)
Average Purchase Value (APV) or Average Order Value (AOV) indicates a merchant’s average order total over a specific period of time. This KPI aligns with Sell-Thru Rate and Stock Turnover Rate by reflecting the impact of marketing campaigns for related product promotions, inventory management, in-store product placement, and ecommerce product pages.
Say you operate four boutique stores for organic gardeners. You’ve stocked a new line of pots in varied colors and sizes, along with gardening accessories, seeds, and soil. By tracking the AOV and reviewing the particular products in each order, you can glean consumer buying behaviors and adjust inventory and pricing.
#3 Gross Margin
The formula: = (total sales – total cost of goods sold)/total sales) * 100
Gross margin is perhaps the MOST important metric. It determines whether your company stays in business. Set it too low, and you’ll fall short in paying your suppliers, employees, taxes, rent, or being able to cover critical operation costs like shipping products to customers. Gross margin needs to be set at a level that covers all costs of business while leaving room to discount items with low sell-thru rates (#4).
For example, apparel retailers tend to work at 30-50 percent gross margin levels, which include any necessary discounting. Specialty retailers with lower sales volumes operate at gross margin levels ranging from 100 – 500 percent given their niche product market fit. Multi-regional retailers’ gross margin is also impacted by currency exchange rates that can affect supplier and shipping costs, requiring adjustments in pricing strategies.
#4 Sell-Thru Rate
The formula = Sales / Stock on Hand (at beginning of month) x 100 (convert to %)
Regularly monitoring your sell-thru rate will indicate if you’re meeting your stock turnover (#5). Sell-thru rates can vary by store location, region, product and product line and are impacted by a variety of factors, including selling season, pricing, demand, promotions, or flash sales.
A fashion retailer would expect the sell-thru rate for lower-cost, everyday items to have a higher ratio versus higher ticket items, such as designer coats. Likewise, sell-thru rates for items like roses will be higher in February, compared with other months. Consistently tracking historical sell-thru rate data over time helps you establish average sell-thru metrics by product and product line and quickly realize sales spikes or dips (as well as the cause). Continually fine-tuning purchasing and pricing strategies and having the data to determine restocking or discontinuing SKUs will empower your retail business to achieve the optimal sell-thru KPI.
#5 Stock Turnover Rate
The formula = (Average Inventory ÷ Cost of Goods Sold) x 365 OR (Cost of Goods Sold / (Beginning Inventory + Ending Inventory) / 2)
Stock turnover rate can have positive or negative financial implications, so requires monitoring as frequently as sales. Since inventory is typically purchased via supplier credit, if that stock is sold before you’ve paid for it, you’re left with more working capital. If stock sits on shelves for long periods of time, that money can’t be spent on operating expenses like payroll, rent, products, or taxes, which can strain businesses. As the clock keeps ticking, the risk of obsolescence increases, forcing you into discount or charge off mode.
#6 Sales Year-Over-Year to Date
The formula = ((sales for time period this year/sales for time period last year)-1) *100
This is the most commonly known retail metric, often used as the key indicator of a merchant’s overall health – but we shouldn’t rely on it to tell the whole story. If you’re not meeting your gross margin KPI because you’ve had to really drop your price points, even if sales to date are higher than the same time as last year, there should be red flags.
Once you’ve analyzed the other KPIs and calculated the factors that provide a clear vision of your operational standing, then your Sales YOY to Date will provide more validity to this metric.
Remember that inventory management and turnover rate can also impact your margins, increasing or decreasing levels depending on your sell-thru rate or your need to discount.
By utilizing these six core commerce KPIs, understanding how they interlink, and consistently capturing the data to analyze each, you’ll develop a deeper understanding of your operational health – empowering your business to grow and thrive.
Derek O’Carroll is CEO of Brightpearl