KPIs, or key performance indicators, are measurable values that illustrate your business performance or effectiveness. They are essential to keep track of in order to understand where your business needs improvement.
Different businesses will have different KPIs. The KPIs you track will depend on your business type, industry, business stage, and your own specific business goals.
First, you have to define your business goals. What’s important to your business? Customer satisfaction and customer loyalty? Employee productivity? Inventory turnover? Choose the right KPI based on your business objectives.
For example, if you’re operating an extremely niche retail store, it’s probably not worth your time to track your foot traffic, as you already know your customer base is quite small. Instead, you should focus on conversion rates, or customer retention rates, to make sure the needs of those few customers are being met.
Usually, a good KPI will follow the SMART criteria – specific, measurable, attainable, relevant, and time-bound.
Here are some of the fundamental KPIs that all small retailers should track to stay on top of their effectiveness, and ensure your business is growing.
Your net profit is your profit after deducting your expenses. This will show you how profitable your business is.
This is an essential key performance indicator, as it demonstrates whether you’re actually making money from your business. Just because you’re generating sales doesn’t mean you’re acting making profits. So, calculate your profitability by adding up your total revenue and deducting all of your expenses – employee salaries, rent, administrative costs, etc.
All revenue – all expenses
Sales per square foot
If you have a physical store, this one is essential. This metric measures your sales per square footage of your retail space, which indicates how effectively you’re using your retail space and how productive your store is.
To find it, use this formula:
Net sales/amount of sales space
Sales per employee
Find out how productive your employees are by measuring their sales. To do this, divide your net sales by the number of employees to see on average how much your employees are making for the business.
Net sales/number of employees
To see more specifically how your employees are doing, you can use Oliver POS employee reports and sale goals to see which employees are meeting their goals.
Average transaction value
This metric will inform you how much your customers are spending per transaction. If your transaction value is low, you might want to consider putting more effort into upselling to increase the value of your transactions.
Total revenue/number of transactions
Year over year growth
This metric simply tells you whether your business is growing or not. While your net profit may tell you whether you’ve made profits, you also want to make sure that your business continues improving.
(current period revenue – prior period revenue)/prior period revenue x 100
Gross margin return on investment (GMROI)
This metric tells you how much your profit was based on the funds spent on inventory. So for the amount spent on inventory, how much did you make back? To find out, follow this formula:
Gross profit/average inventory
Shrinkage refers to missing inventory. This is often due to administrative errors, supplier fraud, or theft. Find your shrinkage by following this formula:
Ending inventory value – physically counted inventory value
Customer retention rate
Keeping track of how many customers are coming back to your store is essential to your growth. When customers keep coming back to your store, it’s a sign that you’re doing something right, whether it’s customer service or product performance.
Here’s how to find your customer retention:
((customers at end of period) – (new customers acquired during period)/(customers at start of period))x100
Want to learn about keeping your customers coming back? Read our blog.
Your conversion rate refers to the number of visitors that actually become paying customers. A low conversion rate could indicate that something is going awry. If your customers are interested enough to come to visit your store but don’t purchase anything, it could be a sign that you’re lacking in customer service or inventory. You should also keep an eye on the competition to see the tactics they use.
Here’s how to calculate your conversion rate:
Number of sales/total number of visitors
This metric will tell you how fast your inventory is moving. If your inventory turnover rate is low, this means you’re not selling enough, or you’re ordering too much – and you might get stuck with dead stock. Likewise, if you’re inventory turnover is extremely high, it could mean that you need to order more stock so your customers don’t miss out on their favourite products.
Cost of goods sold/average inventory