The ongoing disruption of the retail industry impacts nearly all aspects of a store’s operation, including how to measure success. Traditional sales metrics, such as sales per square foot, same-store sales, and online sales vs. in-store sales no longer provide an accurate picture of how well a retailer’s sales strategy is working.
A new generation of sales effectiveness metrics is supplanting older approaches to determining how well a store’s sales strategy is doing in meeting its revenue goals. For example, research conducted by Deloitte found that at least three out of four in-store sales are directly influenced by digital marketing.
Retailers are finding new methods for defining success that more closely mirror today’s integrated, omnichannel marketing environment. In particular, different sales effectiveness metrics apply at various stages of a company’s growth: for startups, the focus is on sales growth and initial financing; while mature businesses pay closer attention to retention rates, margins, and cash flows.
These five next-generation sales effectiveness metrics emphasize creating value by attracting customers and capturing value by sustaining long-term, profitable relationships.
Creating Value: Retail Profit per Transaction and Sales per Unique Customer
To create an accurate picture of a store’s financial position, a sales metric must reflect the way the business operates in today’s multifaceted retail environment. New sales effectiveness metrics incorporate some aspects of traditional approaches to measuring value, such as customer lifetime value.
However, they also represent other factors that retailers can control, that are operationally relevant, and that drive performance. Two such metrics for creating value are retail profit per transaction and sales per unique customer.
1. Retail Profit per Transaction
Customers are influenced by a host of factors when they make a purchase, including an increasing number of digital sources. Shoppers are as likely to visit a store’s website or open its custom app while on the store’s premises as they are from home or another location. This obliterates any clear distinction between online sales and in-store sales.
To determine the overall profitability of a retail business, it helps to break profit down to a per-transaction basis. These are some of the benefits of measuring retail profit per transaction:
- It is channel-agnostic, applying equally to all forms of fulfillment.
- It makes possible like-to-like comparisons between multiple stores or departments.
- It measures both gross and operating margins, and it factors in fulfillment costs (shipping, delivery, in-store, and pickup).
Note that retail profit per transaction excludes revenue from non-sales sources, such as financing, fees, subscriptions, and memberships, and it doesn’t consider back-office costs or overhead.
2. Sales per Unique Customer
This sales metric is related to customer lifetime value, although it typically measures the revenue collected from the average customer over a set period, either several relatively small transactions, or one or two large sales in the course of a year, for example. Like retail profit per transaction, sales per unique customer is channel-agnostic and focused on creating value for relatively new businesses looking to grow by empowering their customers.
- It is useful for measuring revenue growth and market share.
- It generates unique customer counts in terms of acquisition, retention, and growth.
- It doesn’t measure profitability or profit margin, nor does it account for revenue generated from non-sales activities, such as fees and subscriptions.
Capturing Value: Revenue Growth, Return on Investment Capital, and Free Cash Flow
Establishing the initial connection with customers creates value for the retail business, but long-term profitability depends on capturing value once it has been created. Three sales effectiveness metrics that apply to measuring a retailer’s performance and its valuation are revenue growth, return on investment capital (ROIC), and free cash flow.
3. Revenue Growth
This traditional sales efficiency metric has taken on new dimensions with the advent of omnichannel marketing and integrated online and in-store operations. In addition to indicating how much the retailer has grown overall in a set period, revenue growth breaks down the business’s sales performance by operation and by revenue stream, including sources that may be considered untraditional by retailers, such as pop-up stores and mobile operations.
- It provides retailers with a “top line,” channel-agnostic view of growth from all revenue sources.
- It factors in revenue from non-retail sales, including fees, memberships, and support services.
- It doesn’t measure profitability or distinguish sales by marketing channels.
4. Return on Investment Capital
The key to a retailer’s growth strategy is making wise decisions about the most effective use of its investment capital. Like every other industry, retail operations must continuously modernize their operations to maintain a competitive edge and better serve their customers. ROIC is sometimes referred to as “four-wall cash contribution” because it measures how quickly each store can return the capital that the company invested in it.
- It measures how efficiently the store is allocating its capital resources in terms of the profit increase that results.
- It helps retailers determine how much they need to reinvest to sustain revenue growth and profitability.
- It doesn’t indicate which specific segments of the operation are responsible for generating the return on the investment.
5. Free Cash Flow
This metric indicates how well a retailer’s use of controllable cash flow matches with its capital investment strategy. This helps the business decide how much cash to return to stakeholders and how much to set aside for spending on operation upgrades. To calculate it, subtract the money the store spends to support its day-to-day functioning and to maintain capital assets from its total cash inflow.
- It differs from earnings and net income because it measures profitability separate from the income statements’ non-cash expenses.
- It includes spending on equipment and assets, and it factors in any changes in working capital indicated on the balance sheet.
- It indicates profitability and investments in all business areas, but not the performance of specific operations or how efficiently cash is being used, distributed, and reinvested.
Tracking Sales Effectiveness Metrics with a POS Partner
Fortunately, making sense of retail sales data doesn’t require a computer or engineering background. Today’s cloud-based POS systems feature a wealth of sales analytics that paint a clear picture of how well the business’s sales strategy is working. They let stores view sales data in real-time, including all cash drawer activity, voids, and sales per employee. They even indicate how the cost of labor is impacting the business’s performance.
The best investment a retailer can make is in tools that deliver the information it needs to make most effective use of its available resources. talech has a number of POS solutions that can help businesses manage their sales operations most effectively using sales metrics. From reaching new audiences to engaging with your existing customers more often, we give you the tools to adapt quickly and with confidence.
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