The True Significance of KPIs in Retail

We use data to track the things that are most important to us. When we want to know how our websites and social media pages are performing, we look at figures like traffic volume and followers. When we want to know how our bodies are doing, we measure our blood pressure or BMI. To keep an eye on our children’s progress in school, we track their GPAs and test scores.

Retail is no different. To understand the health of your business, you need hard data that can tell you what’s working and what needs work. In businesses like retail, these metrics are called key performance indicators, or KPIs.

KPIs are an essential part of any retail operations strategy. In this post, we’ll explore the meaning of KPI in retail, some examples of retail KPIs, and advice on how to use them effectively.

What Is the Meaning of KPI in Retail?

A key performance indicator—or KPI—is a quantitative metric that is measured and tracked to provide insight into business performance. These indicators help retailers track their progress toward their objectives and evaluate the effectiveness of their strategies.

Improving retail operations is a continuous process that depends on objective, analytical decision-making. KPIs provide the basis for these decisions by distilling business data into simple, easily visualized figures that can be easily tracked without getting into a lot of detail. For example, many retailers track daily sales and plot them as a graph, making it easy to identify trends.

The meaning of KPI in retail can be summed up by the old business saying, “if we can measure it, we can improve it.” While not everything can be easily quantified, the most important things can and should be measured and tracked. Just as we monitor our health by checking our vitals every time we go to the doctor, retailers must monitor the health of their businesses to ensure they’re in good shape—and avoid unpleasant surprises.

Examples of KPIs in Retail

The most important retail KPIs vary depending on the type of business, but these are some of the most commonly used KPIs in retail and their meanings:

• Gross Margin: How much in sales is left as profit after accounting for the cost of goods sold

• Sell-Through Rate: The total amount of inventory sold during a certain time as a percentage of the amount of stock received

• Sales Per Square Foot: The average revenue earned per square foot of your retail space

• Average Transaction Value: How much customers spend per transaction on average

• Customer Conversion Rate: The percentage of potential customers who take a specific desired action, such as making a purchase

• Inventory Turnover Rate: The rate at which inventory stock is sold and replaced

• Product Return Rate: The number of returned products during a time period as a percentage of the total number of products sold

• Shopper to Associate Ratio: The number of customers who visit the store per employee working in the store
• Gross Margin Return on Investment: Gross margin divided by inventory cost, an overall measure of profitability

What KPIs Can Tell Us—And What They Can't

KPIs can provide valuable insights into the performance of a business. If they aren’t used correctly, however, they can lead to incorrect conclusions and counterproductive decisions. Therefore, it's important to understand the meaning of KPIs in retail and what they can and cannot tell us.

So, what can KPIs tell us? Here are a few examples:

• Progress towards specific, quantified goals: KPIs can be used to track progress towards specific goals and objectives. For example, if a retailer's goal is to increase sales by 10 percent, they can track retail sales metrics to see if they are on track to meet that goal.
• Performance relative to benchmarks: KPIs can be used to benchmark performance against competitors or industry averages. This can help retailers identify areas where they need to improve to stay competitive.
• Areas for improvement: By tracking KPIs over time, retailers can identify areas that need improvement. For example, if a retailer's conversion rate is low, they can investigate why and take steps to improve it.
• Impact of strategies and initiatives: KPIs can be used to track the impact of different business strategies and initiatives to gauge their success. For example, if a retailer implements a new marketing campaign, they can track the impact of the campaign on sales.

That’s a lot of valuable information, but KPIs don’t always tell us the whole story. It’s very important to recognize their limitations and when to move beyond KPIs to find more information. Here are a few examples of things KPIs cannot tell us:

• Root causes of performance issues: While KPIs can identify areas where performance is lacking, they cannot tell us why. After identifying an area that needs improvement, further investigation may be needed to determine the root cause of the issue.
• Effectiveness of internal processes: KPIs show us the outcomes of processes, but they don’t necessarily tell us whether those processes are effective. Additional analysis may be needed to evaluate the effectiveness of internal processes.
• Impact of external factors: Sometimes KPIs are affected by external factors—for example, day-to-day sales may be influenced by the weather. While KPIs can identify changes in performance, they can't attribute those changes to specific external factors.

How to Choose and Track KPIs

KPIs are essential gauges of retail business performance—but how do you know which ones to track in the first place?

It’s important to always remember that KPIs are tools, not goals in and of themselves. A particular KPI is only useful if it helps you achieve your business goals. Therefore, before choosing which KPIs to track, it makes sense to start by identifying your goals. For example, if you have a lot of customers but your average transaction numbers are low, you might decide to track average transaction value or items per sale and try to improve these metrics.

It’s not always so simple, though. While understanding the meaning of KPI in retail can help you choose the right KPIs for your business, there are some common mistakes to watch out for:

• Choosing the wrong KPIs: Choosing the wrong KPIs can lead to a flawed interpretation of performance and can obstruct progress. For example, if there is an issue with the profitability of a specific product, but the retailer is focused on tracking sales volume rather than profit margin, they may never identify the problem.
• Not aligning KPIs with business goals: KPIs should be directly aligned with business objectives. If the KPIs being tracked are not tied to business goals, then they’re not providing meaningful insights.
• Tracking too many KPIs: With all the data available to retailers today, it's easy to get carried away with tracking too many KPIs—but this can be counterproductive. Too many KPIs can cause the most important numbers to get lost in a sea of information. This is why it’s important to be selective when choosing KPIs and make sure they’re relevant to your business goals.
• Not tracking KPIs consistently: KPIs are only useful if you consistently track them. Otherwise, it can be difficult to identify the trends that can inform decision-making.
• Not using KPIs to drive action: Ultimately, the purpose of KPIs is to drive action and improvement. If KPIs are not being acted on and used to inform decisions, they’re being wasted. It's essential to actually use KPIs to identify areas for improvement and take action on them.

Understand the Meaning of KPI in Retail and Put KPIs to Work for Your Business

Tracking and understanding the meaning of KPIs in retail is a crucial part of your operational strategy, so it makes sense to use the best tools for the job. SimpliField’s all-in-one platform is designed to help retailers meet their goals and optimize retail operations by integrating communications, analytics, and operations management in one easy-to-use app that your team members can install right on their smartphones.

With SimpliField, your whole team can access relevant KPIs in real time, ensuring everyone is focused on the same target. Easily track and visualize data with our customizable dashboard, or organize your dashboard display by role to only show metrics to the relevant personnel. Our platform gives you the power and flexibility to track the KPIs that matter to your business and put them to use.

SimpliField's business communications, analytics, and operations platform combines everything retailers need to drive flawless execution in every aspect of operations. Contact us for a live demo and see how SimpliField can improve your retail operations today.