What Gets Measured Gets Done –Metrics and their Impact on Your Business – Part 1

In our consulting practice we work with various retail companies and what we have discovered over the years is that while some companies have incredibly sophisticated measurement systems to analyze their businesses and to ensure that what they are doing is really working, quite a few companies don’t. The company size doesn’t necessarily explain why a company wouldn’t (or would) measure performance and very often the larger the company, the less complete and accurate their performance measurement structure.

Here is an example. A fairly large company that we have been working with for a number of years, has decided to rethink its business strategy for one of its divisions. While the company has been able to come up with a clear understanding of what it needs to do based on a thorough analysis of market and consumer trends and opportunities on the horizon, it realizes that something is missing in order for them to go ahead with their plan: a systematic way to gather, analyze and assess the results of their new strategy. With no way to measure success, how can this company even start to evaluate the impact of its new plan, whether it is making a difference in its business or not? How can they know what works and what doesn’t and where they needed to make adjustments?

Here is another example. Think about the last promotion you had. Maybe you bought a new line of running shoes to feature in that promotion and maybe you bought a couple of radio ads to advertise it or you sent out postcards with coupons to encourage customers to come to the store. Was the promotion effective? How do you know if it was effective or not? Maybe, your total sales were higher than last year or last week and that’s why you think it was a good idea. How about the average amount spent by each customer? Was it higher than last week? Or, were the total sales higher because customers came out in larger numbers than usual? Or, was it because they bought more items while they were at the store? There are many reasons behind your sales totals and you need to know exactly what they are so that you can repeat what works and fix what doesn’t work.

There are many different measures of success that you can use to analyze and benchmark your business. There are Sales Performance Metrics and then there are Merchandising Performance Metrics.

Today we are going to focus on Sales Performance Metrics, also called Key Performance Indicators (KPIs).

Selling Cost

You are in business to make a profit. In very simple terms, profitability is the difference between your sales and your expenses. The higher your sales, the lower your expenses, and the more profitable you are. One of the key expenses of running a business is staff. When planning for your staffing requirements – how many Associates you need to support your business – and how much you should pay them, you need to look at your Selling Cost percentage among other things. This metric allows you to assess if you have the right number of staff to support your business, if you are compensating them appropriately based not just on what competitors are paying their staff, but also based on what you can afford to pay them considering your sales, and if they sell enough shoes and clothes (i.e., if they are productive) for you to cover their cost and be profitable. Selling Cost is calculated in the following way:

Associate Total Compensation (Wages + Benefits) ÷ Associate Sales = Selling Cost

$28,000 ÷ $190,000 = 14.7%

In this example, the Associate’s Total Compensation is $28,000 per year and his/her Sales Contribution is $190,000 annually, which means that the Associate Selling Cost is 14.7% (this is what an Associate costs you as a % of your sales). Is 14.7% good or bad? It depends on whether you are self-service (i.e., Wal-Mart, Target, etc.), assisted service (i.e., The Sports Authority, Office Depot, etc.), or a full/personalized service store (i.e., Fleet Feet, Nike, Prada, etc.). The table below provides you with a list of recommended percentages (good-better-best percentages) based on service level.

Self-Service Assisted Service Full/Personalized Service
Good 7% 12% 17%
Better 5% 10% 15%
Best 4% 8% 13%

If your Selling Cost percentage is above the recommended level for your store, it could mean that your Associates are not as productive as they should be (i.e., they are not selling enough shoes and other products due to lack of training, motivation, reward or other reasons that you should investigate), or, it could be that you are simply over-staffed and while your store traffic is very good, you have more staff than you really require most periods of the day and week. Conversely, if your Selling Cost percentage is below the average suggested for your type of store, it could be that you are under-staffed and your Associates are missing sales because there are not enough of them to take care of the customers who are in the store. A low selling cost can also indicate that you are not paying your staff a competitive wage. In very rare situations, however, a low selling cost can be achieved with very high quality staff making great wages and performing at peak output almost every minute they are in the store, rare but not impossible!

Selling Cost is also a very important measure to look at when your staff is negotiating their compensation with you. A pay increase cannot take place unless there’s an increase in their productivity – the amount and value of shoes and accessory items they sell. You may share your Selling Cost with your staff and explain to them that determining a fair pay for their contribution cannot just be based on what they believe they are worth and on what the market pays but also on a realistic evaluation of what you can afford to pay in order to stay in business. If they are able to increase their sales, you are able to pay them more. The more they sell the higher you can pay them, but you can’t have the latter without the former. This may sound a little like commission and in a way it is. The philosophy is the same.

This, of course, will require that you make an effort to generate enough traffic for them to be able to sell more which means that you will need to have the right product, at the right price, in the right place and at the right time. Challenge your staff to tell you whether or not you are on the right track and if they feel that your product, your promotions and your store attract the right customers and use their input to boost your business and challenge them to sell more.

Average Transaction

In my latest book that came out this month titled The Complete Idiot’s Guide To Starting & Running A Retail Store (Alpha, April 2008) , I refer to Average Transaction as “the fastest and most efficient way to get a sales increase in your store.” Average Transaction is the amount, on average, that you sell to each customer. It is calculated in the following way:

Total Sales (for the hour/day/week/etc.) ÷ Total Transactions (for the same hour/day/week/etc.) = Average Transaction (for the same hour/day/week/month/etc.)

$10,000 ÷ 200 = $50

In this example, the store sold $10,000 worth of product and 200 customers bought them, some may have bought $100 or more worth of product and some may have bought $30 or less of product. On average, each customer spent $50. This productivity measure is generally calculated for both the store and each Associate and it can be tracked hourly, daily, weekly, monthly, for a season, or a year. Unlike the Selling Cost measure, there are no optimal levels of Average Transaction that you should achieve. Your Average Transaction is good every time it is more than the week, the month or the year before. In other words, your goal is to continue to increase that number week after week because the more you sell to the same customer, the more profitable you become. Average Transaction indicates how well you are selling the products you have to the customers you already have which means that you are able to bring more money to the register without spending more money in advertising, for example, to get more customers out to shop with you, as they are already in the store. All you need to do is train and motivate your Associates to sell more – more product or higher price items - to the same customers.

How do you motivate your Associates to sell more? Through rewards and incentives built around Average Transaction. Set a goal for the week or the month to increase your Average Transaction by a specific amount. If they achieve the goal, take them out to lunch, dinner or buy them breakfast. Or, if you are able to measure individual contribution, pay them a commission based on the increase they made. Generally, I tend to prefer team contests and team rewards to promote group efforts rather than individual competitiveness. Post the Average Transaction number in the stockroom or somewhere where only your Associates can see it, and track individual as well as store results and make sure to make a big deal out of it as it increases!

Items Per Transaction

Items Per Transaction measures the number of items you sell to the same customer in a single transaction. It is calculated by hour, day, week or month in the following way:

Total Items (for the hour/day/week/etc.) ÷ Total Transactions (for the same hour/day/week/etc.) = Items Per Transaction (for the same hour/day/week/month/etc.)

350 ÷ 150 = 2.3

In this example, while some customers may have bought 4 or more items, others may have bought 2 or less. On average, each customer bought 2.3 items. The more items you sell to the same customer, the higher your Items Per Transaction number. Items Per Transaction like Average Transaction is calculated for the store and each Associate, if possible, and it can be tracked hourly, daily, weekly, monthly, for a season or year. It should also always be increasing and it should never be below 2, because that would mean that all your Associates are doing is selling 1 item to most customers and never attempting to suggestion sell any other items.

Items Per Transaction and Average Transaction are closely related and they both are the result of your Associates’ ability to suggestion sell and up sell (sell higher price items to) each customer. Suggestion selling is about selling a complete solution to the customer and not just a product.

McDonald’s is one of the best examples of a company which has made suggestion and solution selling part of their culture and store DNA. Their Crew Members know that when you go to their restaurant you are not just there to buy a burger. You are there to buy a meal for lunch, breakfast or dinner. Try to order just a burger! They will never let you do just that. They are not going to force you to get something else but they are always going to suggest something else until YOU say no. They also know that whatever else they are going to recommend will ‘go well’ with the burger. They are not going to recommend a recipe book because you are not there to learn to cook but to have a meal which means that fries, a coke, an apple pie are exactly what you will need for a complete meal.

What does a customer who is in your store to buy a pair of running shoes need? Just the shoes? Not very likely! They are either going running or walking. Will they need a pedometer? How about a windbreaker to wear when they are running and it’s cold outside? How about socks? Raingear? Shorts? Leggings? How many other items might they need to make their walk or run perfect, more comfortable, more enjoyable, last longer, etc.?

I always encourage retailers to play this game in their store. It’s called “Give Me 5!” Just point to an item in your store and show an open palm with the other hand and ask your staff to: “Give me 5 items that go with this item for a complete solution” and then do this for every product in your store. Have your staff practice it every day until it becomes second nature and they do it with every customer, and then, watch your sales and customer satisfaction soar!

Conversion Rate

Conversion Rate is another key measure of your store and Associates’ productivity. You calculate Conversion Rate in the following way:

Total Transactions ÷ Total Customers = Conversion Rate

150 ÷ 350 = 43%

You may calculate your Conversion Rate for an hour, day, week or month. Conversion Rate measures your staff’s ability to turn your shoppers – all the people who come into your store – into buyers.

It’s very common for some retailers to attribute low sales to a decrease in foot traffic. In some cases it is true, in most cases other reasons account for the loss of business. Either way, it is important for a retailer to know exactly why sales are dropping, whether it is because there are fewer customers or because the store is selling less. These are two very different situations that require two very different strategies to address.

If foot traffic is low, it could be because the store is not as attractive as other stores in the mall or on the street. Or, the mall or street is suffering from low traffic due to some renovation taking place that is making it hard for customers to get to the stores. Or, it could be that prices are not as competitive or the product is not what the customer expected to find. There are many other reasons why foot traffic may be down, but, in any case, what you need to do is rethink your business model and strategy to make sure that you can meet your customer’s expectations.

But if foot traffic is the same and yet total sales are down, it could be that you are under-staffed and since there’s nobody there to sell them, customers leave empty-handed. Or, it could be that your staff is not maximizing the opportunity to sell more to the same customer. Again, these are just a couple of the many reasons why sales could be down when traffic is the same. However, the first thing you need to do is look at your staffing levels and you also need to train your staff to suggest with every customer (remember Give Me 5!) and reward them for doing it. There is merit in the Nordstrom’s rule of no less than 4 pairs out of the stockroom to show to every customer. Consider making it a condition of employment.

To track and analyze foot traffic you will need to install a traffic counter. The investment is very small and yet its benefits are far reaching. Not only, you are able to objectively assess the true sales potential of your store, you are also able to plan your staffing levels based on traffic thus ensuring complete coverage when there’s more traffic and a leaner staff when there are less customers. The savings you can have by staffing your store based on traffic is incredible and well worth the investment in the technology.

Where It All Comes Together

The following table illustrates the importance of Sales Performance Metrics and in particular it shows how by increasing even minimally any or all of the Key Metrics discussed above, you can dramatically improve your sales.

Case A Case B Case C
Weekly Traffic 600 Customers 600 Customers 600 Customers
Conversion Rate 25% (150 Transactions) 28% (168) 28% (168)
Average Sale $45.00 $45.00 $55.00
Total Sales $6,750.00 $7,560.00 $9,240.00

In all 3 Cases, the number of customers is the same: 600. In Case A, one in four customers buy with an average sale of $45. In Case B, if we improved the Conversion Rate by a mere 3%, we would achieve a 12% Total Sales increase. Not bad for just selling to 18 more customers! In Case C, if we maintain the 3% increase in Conversion Rate and we increase the Average Transaction by $10 (it could be just adding on a small accessory item to each sale, such as a pair of socks), now we are able to achieve a dramatic 36% sales increase on the same traffic!

Stay tuned for our next issue where we are going to talk about Merchandising Performance Metrics.

Go to http://www.dionco.com to purchase.

Jim Dion, founder and president of Chicago-based Dionco Inc., is an internationally known consultant, keynote speaker, trainer, and author of the best-sellers Retail Selling Ain’t Brain Surgery, It’s Twice As Hard, and Start and Run a Retail Business. His newest book The Complete Idiot’s Guide to Starting and Running a Retail Store, is available at http://www.amazon.com or http://www.dionco.com

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