This week I want to get a little more sophisticated.
If you're not already acquainted then I would love to introduce you to KPIs. First, I'll tell you a little about what this abbreviation means and then I want to talk about which ones to use, how to use them and why you should use them.
What Are KPIs?
So you're probably wondering what this silly corporate jargon means... KPI is an abbreviation for Key Performance Indicators and it simply indicates the performance of your business.
There's a whole bunch of different KPIs that you could incorporate into your business but the keyword in the abbreviation is key. Meaning that you should focus more on indicators that highlight the performance of the main drivers of your business.
What KPIs Should You Use?
Let's put together a little list of the main KPIs used in retail. I'm going to create two groups of KPIs with no more than five KPIs, one for e-commerce and the other for the physical stores as they both will track different things in a slightly different way. Don't worry I'll also talk about what they mean and why they matter too.
- Footfall Conversion Rate: footfall is a measurement counting the volume of people entering the store and the conversion rate calculates how many of those people make a purchase. Footfall tends to be measured within larger organisations as there's more data to work with but it doesn't hurt to give it a go. Average conversion rates tend to range anywhere between 4% and 8%, this could be a lot higher if you could track not only purchases made from in-store customers but customers who decided to make a purchase online after visiting the store.
- Total Sales By Time: this KPI is the most important of them all, it simply tracks your total value in sales, of which you can decide whichever time period you wish to monitor (could be calculated on an hourly, daily, weekly, monthly, quarterly or annual basis). This KPI can give you insight into your best performing times or seasons. This could also come in handy to make financial forecasts too.
- Average Order Value: Another important KPI for retailers of all sizes. The calculation is simply the value of total sales divided by the number of purchases. This will give you an insight into whether you're up-selling techniques (could be influenced by your store's team or via visual merchandising) are working when comparing two periods together. The fashion industry average differs by country, by device and also when comparing online vs offline but typically sits around the £60 mark when averaging everything out. You could also extend this KPI to measure items per order too!
- Sales Per M³: Again, this tends to be more useful toward larger organisations to ensure that their merchandising teams are using space effectively. This KPI measures the number of sales made in a specific space in the store to give you an idea of product placement is optimised and each m³ is profitable when comparing the sales per m³ with the cost of the space.
- NPS: You may have seen this term floating about as this KPI is heavily used throughout many industries now. It stands for Net Promoter Score and it measures the customer's experience by asking the question; how likely are you to recommend [your brand] to a friend, family member or colleague? The answer is scored on a scale of 0-10 (0 being not at all likely and 10 being extremely likely. Here's where it gets a little complex; the customers that score you between 0 and 6 are called Detractors, meaning that they are unhappy customers and could well tarnish your brand through negative word-of-mouth. Scores of 7 and 8 are called Passive customers, who are satisfied but not enthusiastic and are vulnerable to competitive offerings. Scores of 9 and 10 are your evangelists (referred to as Promoters) — they will likely spread their positive experience via word-of-mouth and happily refer people. Again, this KPI can be used by any size retailer that cares about their customers' experience.
- Traffic & Conversion Funnel: This is a similar concept to footfall and conversion rate, meaning that you're able to track people visiting your site (commonly referred to as traffic) and how many purchases are made. However, because of the advancement in analytics, we can actually dig a little deeper than that when compared to physical stores. We can learn about how many of those people viewed products and which products and also learn about customers who added products to their basket/cart. With this knowledge, we can find out cart abandonment rate too by detracting the number of transactions from the amount of "add-to-carts" (amount of people who added products to their cart and didn't complete a purchase). Be sure your Google Analytics is set up first, otherwise, you won't have much access to this info.
- Total Sales By Time: This is the same KPI used for physical stores.
- Average Order Value: Again, this is the same KPI used for physical stores.
- New Vs Returning Customers: This is used to find out how many of your site visits are made by new or returning visitors. The returning visitors KPI is one of the most underrated KPIs in site analytics. This could be used in conjunction with NPS to monitor customer satisfaction. The only difference with this KPI when comparing with NPS is that this is an action rather than un-actioned feedback. With the sophistication of analytics and tracking, you can actually see them visit your site again and discover how many of your returning visitors make another purchase. Make sure to set up your Google Analytics correctly to be able to retrieve this info.
- Customer Acquisition Costs: This is more relevant when getting involved with advertising, however, it's still useful to know even if you haven't got marketing spend. Essentially, the customer acquisition cost (CAC) calculation is the total amount spent on marketing/advertising to acquire customers within a period of time divided by the number of acquired customers with that same period of time. For example, within a year you spent £100 on marketing and managed to acquire 100 customers within that same year. £100 / 100 = £1.00, your customer acquisition cost is £1.00. Make sure this cost doesn't exceed the value of that customer or how much value they purchase.
When Should I Start Using KPIs?
The answer: it depends. It depends on the size of your organisation (the bigger the scale the more KPIs to measure for efficiency and optimisation, to increase profits), the stage of your business (retailers that are in their early stages probably should only worry about the basics, initially and, most importantly, it depends on your goals and targets.
Once you start retrieving data, it's good to try and make sense of it all and to see how far along you are to accomplishing your goals and how to influence them.
I love all kinds of analytics. I'm a big believer in being data-driven but too much can be quite overloading. Try and stick to no more than five KPIs to measure at a single time and only choose KPIs that drive the core of your business or ones that monitor the progress of your goals you've set to achieve, don't rely on vanity metrics (things that look good but but are not directly relevant to growing the business).
In future posts, I would like to dig a little deeper into each KPI and discuss ways in which you can influence it.
As usual, my emails are open for questions, feedback and ideas (email@example.com).
Until next time.