Why Conversion Isn’t the Only ‘Best’ Metric

Natasha Olechowski
Natasha Olechowski

Behind store traffic, conversion – the percentage of traffic that completes a purchase transaction – might be retail’s most fundamental metric. But, all too often, it’s misused and mismanaged.

Conversion has been both metric and buzzword in retail for decades, and it’s an important one too. When I was a store director, conversion was a key metric on which we would compensate store managers (along with Average Transaction Value, ATV, and Units per Transaction, UPT). One of the virtues of conversion is that it’s a simplistic measure, but even so, still one that is frequently misunderstood and mismanaged. 

Calculating conversion is simple. Conversion is the percentage of store traffic that completes a purchase transaction, and it’s calculated as:

Screen Shot 2015-08-10 at 11.20.58 AM

Conversion rates can vary greatly across retail segments. Grocery, for example, has conversion rates of close to 100 percent – very few shoppers go to browse grocery aisles. Specialty apparel retailers, however, might see conversion rates somewhere in the 20 to 40 percent range, and it’s dependent on a variety of variables.

All things being equal, a retailer wants to have higher conversion. Twenty percent is better than 10 percent, but not as good as 30 percent. Remember though, that’s with all things being equal.

Where retailer often begins to get in trouble is when it begins to focus on improving conversion and first starts with an organizational or industry “standard” or “average” conversion rate. While conversion is a critical component in increasing sales, it’s just one component, and the last thing a retailer wants to see happen when having its sales team focus on increasing conversion is to see its ATV tank – what good is more transactions if each is worth less? Increasing sales is ultimately is a juggling act between conversion and ATV.

When consulting with retailers at RetailNext, I suggest they avoid blanket target metrics across districts, regions and entire chains – for example, increase conversion at each store to 30% or greater. Rather, I encourage them to coach and challenge stores to increase their individual performance relative to their previous results.

Stores just one mile apart can have entirely different circumstances from one another. So, instead of stating the entire organization must get to a ‘X’ conversion rate, challenge every store to increase its conversion rate by 1 point while maintaining its average sale.  

But there’s more than just conversion!

When I work with retailers, I like to introduce them to Shopper Yield. Shopper Yield is another simple calculation:

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Shopper Yield is great metric that allows retailers with multiple stores to benchmark stores against one another to determine where store operations opportunities – and resources! – lie.

Envision two stores:

                                  Store 1           Store 2

Conversion                 16.5%              15%

ATV                             $85.81            $98.00

Which store is performing better? Is it Store 1, with higher conversion? Or, is it Store 2, with higher ATV?

Let’s add on Shopper Yield to the analysis:

                                  Store 1           Store 2

Conversion                 16.5%              15%

ATV                             $85.81            $98.00

Shopper Yield            $14.16            $14.70

Store 2 has the higher Sales Yield. So, it’s the winner? Not so fast.

Both stores have opportunities to improve, as well as opportunities to share best practices and help lift the performance of the other store and, in turn, the entire organization.

Store 1 can take best practices of Store 2 and train its associates to increase ATV, perhaps through add-on accessory sales or “trading up.” Store 2, on the other hand, can better train its associates on conversion, and perhaps deploy a staffing model that better aligns staff with traffic, or takes better advantage of “magic hours.” A great way of visualizing multiple store performance comes in tools like the RetailNext Performance Quadrant – for more information about it, please see my colleague Shelley E. Kohan’s (@retailshelley) post here.

All in all, traffic, conversion, ATV and Sales Yield are all driving Sales in stores – by better understanding all four metrics, a retail manager can really start to increase a store’s performance and contribution margin. It also creates a climate of continual improvement against a store’s past metrics as opposed to sometimes unachievable metrics from other stores, either in the chain or competitors in the industry.

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