There are basically two ways for a retailer to boost profits: increase revenue or decrease costs.
Behind this gross oversimplification are vital sales performance tracking tools that help retail stores identify how well they’re doing in achieving both goals. Here’s a quick look at 11 key performance indicators (KPI) for determining the best ways to enhance the productivity of your sales operations.
Customer Acquisition Cost and Customer Retention
Customer acquisition cost measures the average amount of sales and marketing costs necessary to gain one new customer. It’s found by dividing the total amount the store spends on sales and marketing in a set period by the number of new customers it attracted in that period.
For example, a business that spends $1000 per month on marketing and sales and acquires 20 new customers per month has a customer acquisition cost of $50. However, it can take several months for a new company to convert visitors into customers, so businesses must also calculate how long they need to retain a customer until they break even.
To calculate customer retention, subtract the number of new customers acquired in a period from the total number of customers at the end of the period, and then divide that figure by the number of customers at the beginning of the period. So if you started the period with 200 customers, lost 20 customers, but gained 40 customers to end the period with 220 customers, your customer retention would still be 90%.
One of the most important benefits of modern POS systems is their ability to integrate inventory management with sales tracking. The sales-analysis reports generated by cloud-based POS systems automate the process of tracking conversion rates, which many retailers consider the most important KPI for sales.
To calculate a store’s conversion rate, divide its total number of sales by its total number of visitors. For example, if it has 20 visitors and 5 sales, its conversion rate is 25% (5 divided by 20 equals 0.25, or 25%). To increase the conversion rate, train employees to build rapport with customers and impress them with their knowledge and expertise, but to do so without being pushy.
Customer Lifetime Value
Another popular tool in the sales performance tracking arsenal is customer lifetime value (CLV), which indicates the value a customer brings to the business from the time the customer is acquired through all their subsequent transactions with the retailer. CLV is determined by multiplying the average annual revenue generated per customer by the number of years the person has been a customer, minus the cost of acquiring the customer.
Gross Profit vs. Net Profit and Gross Margin Return on Investment (GMROI)
Comparing a store’s gross profit vs. net profit shows how efficiently the store is converting sales and revenue into actual profit. Calculate gross profit by subtracting the cost of all goods sold from total sales revenue. Net profit is found by subtracting the cost of all expenses from the store’s total revenue. If gross profit is low, look for ways to reduce the cost of goods the store buys. If net profit is low, it may be time to cut operating expenses, raise prices, or increase your average order value.
By contrast, GMROI measures the profit generated by the store’s total investment in inventory. To determine GMROI, divide your average inventory value by the store’s gross profit. When used to measure the value of specific products or product categories, GMROI helps stores identify the products that are generating the most profit for the business.
Sales per Category and Sales per Employee
Both of these sales performance tracking metrics are geared toward making a retailer’s operations more efficient and profitable. By measuring sales per product category, stores can assess the performance of specific items compared to the business’ overall sales. Start by identifying the product categories and subcategories to be measured, and then divide each category’s net sales by total net sales to find the percentage for each category.
Similarly, calculating sales per employee helps retailers determine how expensive it is to run their businesses. It’s determined by dividing annual sales by the number of employees. A high number indicates an efficiently run operation, while a low number may mean that the company’s overhead costs are too high.
Average Transaction Value
This metric lets stores know how much customers spend per transaction, which tells them how effective their sales and marketing operations have been. To find it, divide the total number of transactions by the store’s total revenue. If the average transaction dollar value is low, the store may need to rethink its pricing or implement marketing and promotion efforts geared toward convincing customers to spend more.
Growth is a key component of nearly every retailer’s strategy, but it’s all too common for managers and owners to get caught up in the day-to-day operations of the business and lose sight of the long-term picture. By comparing sales and profit from the current year (or another time period) to those of previous periods, the store sees at a glance how much progress it has made in reaching its growth goals.
To improve year-over-year growth, first determine whether the reasons for missing growth targets are internal or external; inefficient operations and market conditions can both lead to slower-than-planned growth.
This is the point at which a retailer’s sales equal its expenses. It’s determined by dividing the store’s gross margin percentage by its fixed costs. Margin is used in the calculation rather than sales because the goal of the metric is to indicate what will happen rather than what has happened in the past. Retailers should pay close attention to the trend rather than the break-even point itself; an upward trend from that point indicates health, while a downward trend may call for changes.
What Sales Performance Tracking Tools Can Do for You
Retailers don’t need to be math majors or look for outside assistance to benefit from many of the same sales analytics tools used by large enterprises. Today’s cloud-based POS systems automatically generate reports that provide stores with a real-time view of sales data and cash drawer activity. They measure each employee’s sales performance and help stores understand how labor costs are affecting their businesses. Retailers that fail to take advantage of the capabilities built into POS systems are missing an opportunity to take their businesses to the next level.
When you partner with talech for your retail technology needs, we devote our time to identify your business challenges. We use this information to work with you to apply an innovative POS solution that provides sales performance tracking tools that can drastically increase both productivity and profitability.
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