Key Performance Indicators (KPIs) are tools used by businesses to measure and manage performance. They help to evaluate the overall viability of a business over a given period and how successful the various activities of the business have been in fulfilling its mission. It effectively breaks a business’s goals and objectives into workable and measurable actions, giving a clearer understanding of what such goals are and how they can be achieved. They are not static, but constantly evolve depending on the business area or function one wants to concentrate on. For instance the business development function of a financial service provider may aim at expanding customer base within a particular year. In achieving this objective, quantitative targets may be established for sales staff, e.g. each staff is expected to bring in 10 new accounts by the end of the period. These targets become the indicators which will be measured at the end of the period to assess how well the stated objective has been achieved.
Like all other forms of businesses, retailers adopt both quantitative and qualitative key performance indicators to measure performance of their business units in relation to set objectives. For example, the marketing team in a retail store uses marketing KPIs such customer acquisition, while the HR team may be interested in measuring staff turnover. There are over a hundred known indicators that retailers can apply, but not all would be adopted at every point in time. There are however certain indicators that are basic and I believe should be the focus of every retail business in the quest to maximize sales and remain profitable.
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Here are 7 basic KPIs every retail business should pay attention to.
Sales & Gross Profit Margin
Sales remain the backbone on which every retail business is built. Sales generated over a period of time is the single most important performance indicator for every retail outlet and has to be constantly measured. Sales can be compared across locations, product categories, etc. to identify performance trends and to help in formulating marketing strategies which will keep the business in good shape.
Gross profit margin is a measure of gross profit as a percentage of sales. It measures the financial performance of your business in terms of profitability. For brick-and-mortar retailers it is also important for determining markup percentage on products. Measuring sales, cost of goods sold and gross profit margins are the simplest sales KPIs that most businesses should adopt.
Business Traffic
Business traffic metric also known as footfall, measures the number of visits to your outlet within a particular period by taking a physical count of visits to the store, or visits to your website for online businesses.
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It uses people counters or advanced means such as heat sensors and mobile tracking devices, but for a typical retailer in Ghana, taking a physical count on periodic basis could be adopted. Google analytics helps track traffic for online businesses. The rate of business traffic directly reflects on the level of patronage in your business. It is also an important measure to business units such as marketing and HR functions. For marketers, it helps to track progress made with existing advertising campaigns aimed at expanding visits and eventual customer base. Secondly footfall patterns is useful in making staffing decisions by your HR function by ensuring that adequate sales staff are present to serve the needs of visitors especially during peak visiting times. This is particularly relevant for retailers in highly specialized electronic gadgets, vehicles and other specialized service providers who are required to give one-on-one attention to store visitors and prospective customers.
Conversion Rates
Conversion rate measures the percentage of visitors who patronize your products or services within a given period. For brick-and-mortar retailers, it evaluates the strength of instore functions such as customer service, in-store sale strategies, merchandising and shopper experience, by indicating how many customers have been made from visits to the store over a given period. Measured by dividing sales transactions by gross traffic for a given period, the indicator is used to assess how many purchases are made from every customer who walks into the shop. For instance if a 100 customers visited your store within a period and sales was 45 units, conversion rate for the store would be 45%. A higher conversion rate implies a business is highly successful at getting purchases from store visitors. A lower rate should be of concern to instore functions such as customer service, sales and merchandising.
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Loss prevention (stock shrinkage)
Every business is susceptible to losses and none is immune to the negative consequences of such losses. A business can incur huge losses as a result of shrinkage in stock, the loss of cash or damage to image or reputation a result of a negative occurrence.
Loss prevention KPIs are tools used to detect, deter and prevent business losses due to theft, shrinkage and errors. The indicators measure occurrences such as cash overs and shortages, stock pilfering & expiration, supplier shortages, and store or transit damages. The aim should be to identify the extent of losses incurred over time and implement measures to reduce or curtail such losses.
An article by IPI Innovations suggests that business losses are mostly from employee lapses and are normally as a result of the following;
1. Employees who are ignorant, and so commit errors
2. Employees with negative attitudes; who are not inclined to do things right.
3. Employees who are dishonest and intentionally steal from the business
For instance, a loss prevention KPI which measures frequency of cash overs/ shortages with cash handling units would be a useful measure to identify staff who fall short of cash handling skills and require further training. Some employees make mistakes because they don’t know the correct methods. Also, realistic targets with correctional and punitive measures can be implemented especially for employees with negative attitudes as wakeup call.
Service
KPIs for measuring quality of service are extremely important for retailers and businesses in the service industry, for instance retail outlets for the telecom companies and financial service providers. The quality of service rendered to customers is an important measure of how successful the business is and how it would fare in future. As mentioned in an earlier article, today’s customers attach emotions to the buying process and would remain loyal to businesses who offer a positive shopping experience. Offering valuable service should be a core performance indicator for all businesses. Popular among these KPIs are customer satisfaction, customer retention, and number of complaints, customer service staffing and customer waiting times. The customer satisfaction metric measures the quality of your customer service and is a reflection of the public’s perception of your business. Happy customers would normally share their experience with 2-3 people but unhappy customers will share their experience with 8-10 people (source: How Customer Service Works).
Hence, serious consideration should be given to conducting customer satisfaction surveys and the results that come out of it. Data can be gathered by distributing simple questionnaires to customers at the vantage points in store, or by emails or other messaging means to customers’ contacts on your business database. Be certain to collect responses in order to have feedback that is an accurate representation of majority of customers.
Customer retention measures your ability to retain new customers and generate business with existing customers. Customer service staffing metric measures the number of employees dedicated to the customer service function as a percentage of the total number of employees in the business. It is measured quantitatively along with number of customer complaints within a given period.
HR Development
Your people matter indeed to your business and in measuring and managing performance of business units, KPIs that measure activities in the HR function should be adopted. Key areas such as staff turnover, staff training and employee job satisfaction should be measured. Employee turnover metric measures the rate at which employees vacate their positions and are replaced with new employees within a given period. Measured by dividing overall number of employees by the number of posts vacated, a trend of high employee turnover is a situation of concern that should raise questions with your HR function. Retail business may be characterized with high employee turnover, but at the same time some retailers have a good track record with this metric and are able to retain rate of employee turnover far below industry standards. Training is another area that requires attention and a focused KPI could be to ensure all employees take an hour per week training on their areas of operation.
Operational KPIs
These indicators assess the operations of the business to ensure processes remain efficient and robust. They measure operational issues such as, stock turnover and stock availability and integrity and operational processes. Stock turnover measures the number of times stock is sold within a given period. It is important to track this KPI because it helps to analyze inventory levels, and ensures overall efficiency by reducing inventory costs and increasing profits.
A measure for stock availability or out-of-stock items within a given period helps to track trends in product demand, thus providing a guide for buying decisions.
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For service providers, a measure to track average waiting times for customers would give an indication of the duration of processes meant to serve customers. Shorter waiting times implies more efficient services, and vice versa. This metric identifies cumbersome and less efficient processes which causes delay to business operations.
When metrics measured within the various business units are properly analyzed, adopting KPIs should lead to an improved performance in the business as a whole. Avoid setting vague and immeasurable KPIs such as “to serve customers more efficiently”. A better measure would be “to reduce waiting times to a maximum of 3 minutes per customer”. As Peter Drucker, a business management expert once said, “What gets measured gets managed”. An effective use of KPIs helps employees understand what is expected of them and management to determine the necessary course of actions to undertake for improved performance.
Author: Author: Amma is a Lead Consultant and trainer with M-DoZ Consulting. Kindly contact her on 0201196080 or email amma.antwi@ghanatalksbusiness.com for further information or contribution.
