28 May 2020
By Drew Smith
Drew is the Director of Product Strategy at Upp and focuses on how technology can help brands and retailers deliver what their customers want.
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During even the best times, competitive retail businesses need to develop and track the right key performance indicators, or KPIs. These metrics will ensure you're on track to meet business goals or let you know which areas could use improving. In the time of the coronavirus epidemic, retailers need to take even more care to keep track of their business metrics, as well as a variety of different departmental metrics in order to ensure they all align in the favour of improving profitability.
While the outbreak hasn't affected all retail sectors the same way, there has been a 16.4% overall slump during April of 2020 after already declining over 8% in March. Even during boom times, the right numbers will help you take advantage of opportunities and overcome obstacles. During economic downturns, having the information that you need to make good decisions can make the difference between sustaining your business and having to make drastic cuts.
Here are 6 KPIs you should track in order to ensure you’re on track to meet Business Objectives and make the best decisions in order to increase the profitability of your retail business.
Revenue is the sales you generate with the sales of your products and is a vital business objective for retailers. It gives you a quick and easy-to-understand snapshot that you might compare to previous months or the same month or season in previous years.
You should always be aiming to increase your revenue. Many retailers may get wrapped up in beating their competitors’ revenue growth — however, this often doesn’t work because no businesses are exactly alike. You need to compare your revenue growth to your previous year’s growth and ensure you are reaching your goals of profitability (more on this later!).
Like many other retailers during this time, you may find that your sales of certain kinds of items has increased while other sales figures have gone south. In other cases, you could find that consumer behaviour has shifted from their former habits in ways that you must account for.
For example, you may see that your customers have stocked up on less discretionary items while putting luxury or nice-to-have purchases on hold. Following another current retail trend, customers may have decided to shop online more and visit stores less in response to social distancing measures. To give you a better view of performance, you may also want to divide your totals up. For instance, you could split out sales by types of products, sales channel, or even time of day or day of the week.
As a short-term goal during the current crisis, you may simply want to maintain or increase overall revenue. Your total sales KPI will tell you how well you're meeting that objective.
Particularly important in retail, the sales conversion rate tells you how many of your online visitors convert into paying customers. For instance, if you typically need 100 visitors to make a sale, you have a sales conversion rate of one percent. You made some investment to ads, social posts, or other marketing to attract all of these visitors, so improving your conversion rate can dramatically increase your marketing returns and overall profits.
Some simple tactics to improve your online sales conversion rate might include:
Market share is the portion of sales from a specific market divided by the total market size. Ideally, retailers will want to have 100% market share, and a declining market share is not seen as desirable from the viewpoint of investors.
Market share growth means that your company is obviously doing something right and that you are in a stronger position compared to your competitors. The way to keep market share up is to think about your acquisition strategies and adapt these to new audiences if necessary, create innovative marketing campaigns and differentiate yourself from competitors.
Investing in marketing and sales should help you gain more customers. However, you need to make certain that you're not spending more money than you're earning in profits. David Skok serves as the general partner of Matrix Partners. He believes that failing to calculate the amount it costs to gain a customer kills more startups than any other factor.
Of course, improving conversion rates will help reduce this cost. That could mean improving your ads, but you might also benefit by investing in a loyalty and referral programme. Referral programmes encourage effective word-of-mouth advertising, and loyalty programmes help retain your most valuable customers: the loyal ones.
Profitability is one of the main business objectives that retailers should consider when growing their business. Business metrics (revenue, customer acquisition etc.) and departmental-focused metrics that different teams will find important (e.g. ROAS for the marketing team, or return rate for ecommerce team) are all important factors to track when measuring profitability.
Profitability will allow you to see not only how your revenue is, but also how much you are growing as a business. The data you collect on profitability will help you gain better insights into how each department is performing, so your overall strategy can be better aligned with your profit margins. Let’s look at how net profit and gross profit can help you achieve this.
You simply need to subtract expenses from revenue to calculate your net profit. Expenses include operating expenses, administrative costs etc. In the long run, you need to earn profits and not just revenue in order to maintain and grow your business. This KPI will help ensure you’re doing that.
During this crisis, you might expect your margins to suffer if you do business in some retail sectors. At the same time, even if you don't always get good news, it's still much better to know than to guess.
While net profit considers all expenses, you calculate gross profit simply by subtracting a product's cost from the price you sold it for. You might also see this expressed as the gross profit margin. This refers to the percent of profit. For example, if you paid £25 for an item that you sold for £50, you would have a profit margin of 50 percent.
During the pandemic, you may not always have the best choice of suppliers and might need to reduce some prices to satisfy an uncertain market. In the long run, you can strive to manage your inventory to achieve higher profit margins.
When you have a tool that can combine performance-level information, important business metrics and recent trends, you can clearly see the whole picture to make the best decisions. Even with the complexity of an omnichannel market, AI tools will ensure you don't miss the most important insights. You'll be able to see if you're meeting your KPIs and exactly what you could do to improve in the future. Upp can help empower retailers to make smarter decisions that drive product profitability and product growth.
Selling your products online on the right channels is essential to give your brand a competitive edge. However this can only be effective if departments are all aligned around not only their departmental metrics but also the key metric of profitability. For example, while your ecommerce team may focus mostly upon digital conversions, your marketing team has to look broadly at the total return on ad spend. Meanwhile, your sales department may care mostly about customer acquisition and overall sales. By using all of your information to present your diverse teams with the big picture, you can keep them in better alignment. This will help you achieve the goal of profitability your business should be aiming for.
And better-aligned companies work more productively to achieve business goals. AI platforms will help you rise above simple metrics that won't ever tell you the entire story. Not only will they report upon how well your entire business performs, they will help keep your whole company synchronised to support those goals and increase profitability.
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