I am a golfer. I started playing when I was four years old, and it has been my primary hobby ever since. My father taught me at a very young age that the path to being a good player is practice. I spent countless hours on the driving range pounding ball after ball until my hands hurt. After a few weeks of this dedicated work, my game had not improved. In fact, it had gotten worse. That is when my father told me that it’s not about how much you practice, but how you practice. Each practice session needed a goal, a purpose, something to accomplish. These goals were based on what areas of my game needed improvement.
Determining the areas in which to improve were based on stats I gathered from each round I played, showing me my putting performance, how many greens I hit in regulation, how many fairways I hit off the tee and a few hundred other metrics I kept track of in my little notebook. The results were a consistent improvement in my game and a much more efficient and enjoyable practice routine. The concept of specific measurement and analysis to target improvement is not rocket science. It follows logic that is easy to understand but may prove difficult to apply on a regular basis. In other words, it is much easier to walk out to the range and just start hitting golf balls.
The same holds true for business—retail businesses especially. There are many things a retailer needs to accomplish each day just to keep the doors open. Finding time to review performance metrics has a tendency to fall to the bottom of the priority list (or off it completely). But to effectively improve your business—and ultimately your bottom line—it should be priority No. 1.
Before you can effectively measure and improve your retail business, you have to have a strong hold on two key areas—cost structure and competition. Understanding the true cost associated with the retail side of your business is vital to ensuring long-term profitability. This cost goes far beyond just acquisition cost and includes overhead, burdened wages, delivery, service, maintenance, marketing and inventory costs. It requires a regular and detailed profit and loss review that clearly separates your retail business from your third-party paying business.
In addition to knowing your cost, you must also know your competition inside and out. This means knowing not just competing companies, but competing products as well. It means knowing not just the selling price of the guy down the street, but also the additional services he offers. This also means knowing how each of your products stacks up against Internet retailers. Knowing your competition allows you to make specific decisions about what your value chain will look like to best position your store in the broad retail market space. Shop your competition, learn about competitive products you do not carry, explore the Internet side of the industry and honestly evaluate how you measure up.
After calculating cost and determining your competition, you need to nail down the baseline for your company’s performance. You do not know how to get where you want to go if you do not know where you are right now. Once you establish the baseline, you can then work toward specific goals and benchmarks of success. So, what should you measure? There are dozens of retail metrics to choose from, and each retailer needs to determine the ones that work best for his or her business. That being said, here are a few that I believe should be on everyone’s list.
Gross Margin—This is the most important metric of all. Nothing else matters without a competitive, profitable gross margin. Use your recently gathered understanding of your cost and competition to set the right gross margin for each product in your retail store.
Dollars Per Square Foot—Each inch of your retail space is incredibly valuable. This metric illuminates what products are making the most of the space they are taking up. Dollars per foot quickly highlights your rock stars and your underperformers, allowing you to change up your product mix to maximize sell-through. Measuring this number will also get you focused on display and help you use your space as effectively as possible.
Average Ticket—This is a measurement of how much each customer spends in your store on average. Obviously, you want this number to be as high as possible and on the rise. This metric brings a focus on bundle selling, higher value products, custom options, accessories and special added services your company provides.
Traffic Flow—Keeping track of how many customers walk through your door each day is vital. It allows you to note trends and seasonality, leading to more efficient staffing and scheduling. It provides a basis to measure the success of specific marketing programs. It also sits as the basis on metrics such as close rates, cost per customer and cost per transaction.
As I mentioned above, there are dozens of retail metrics you can employ. The point is to actually employ them. Retail is all about value—offering value to your customers and building value for your company. Retail metrics allow you to make the right decisions to continually build this value. They change the discussion from “What does this cost me?” to “What does this earn for me?”—which leads to happier customers and a healthier bottom line.
