The fundamental measurement of sales opportunity for any brick-and-mortar retailer is based on traffic metrics. Online retailers have been measuring this opportunity for decades, and most physical retailers are applying this metric to their own stores. However, as an industry, we continue to measure store results on sales, a lagging indicator of performance.
Yes, I get it. Sales dominates all other metrics, and it is what our budgets, planned capital expenses, profitability and general focus of retail needs to be based on. However, more important than what is rung up at the till is identifying what wasn’t rung up at the till. What was our lost opportunity and how do we better capitalize on it and improve future performance?
For this blog, let’s set aside the ability to “drive traffic” and focus on the traffic that crossed the threshold of the front door line (I will be discussing traffic opportunities outside the front door and ways to measure marketing efforts in driving traffic to the store in my next post).
Let’s start for with the basics. Traffic is simply defined as the number of shoppers that enter the store, and advances in video analytics have made traffic counting more precise than ever before. In fact, with today’s enabling technology, video analytics can even provide aggregate data as to age and gender.
But, traffic counting, alone, is usually not good enough to stand on it’s own.
Conversion is a metric that measures what percentage of the traffic actually engages in a transaction, and is a function of the number of transactions divided by store traffic.
Conversion gets retail leaders closer to a valuable actionable metric, but again, as a standalone measure, it’s not good enough.
Average Transaction Value, or ATV, goes a bit further, and represents the average sales value of each transaction. So retailers on a basic level should understand the traffic, conversion and ATV of every store.
Oftentimes retailers stop here. In fact, with the variety of retailers that I meet with on a consulting basis, they will ask me if they should focus the store performance drivers on conversion or ATV. I look them in the eye without hesitation and say, “you need to focus on both.” At the end of the day, either metric can drive sales on its on merit. However, understanding which levers are impacting the sales results are critical in driving total company performance. Let me explain.
At RetailNext, I advise clients to measure sales, traffic, conversion, ATV and Shopper Yield. The Shopper Yield is determined by multiplying Conversion with ATV, as shown below:
Shopper Yield is a bit more robust in nature, and it helps retail leaders ask better questions. With better questions come better answers, and, in turn, better strategies for improvement. Retailers understand their markets and realize that various markets will demonstrate different shopping behaviors. Arming business leaders with the data that helps stores drive their individual performance will ultimately move the total company performance.
Let’s refer to the following three stores that fall under one district manager’s responsibility:
Which is the better performing store? Store 1 leads the way in Conversion at 14.6%, so most business leaders (in this case a district manager) might challenge stores 2 and 3 to improve performance. However, when looking at Shopper Yield below, we find a different outcome!
The district’s performance narrative begins to expand now. Store 2, on the basis of a solid Conversion and ATV, has a Sales Yield of $16.65, highest in the district. With additional data better defining the picture, the district and store managers have a more accurate idea of performance, and that will lead to a more accurate diagnosis of root opportunities for improvement. A great tool from a total company perspective in driving store performance is using the RetailNext Performance Quadrant which takes into account all of the vital metrics.
Action plan: The district manager in this case should challenge Store 1 to improve its Shopper Yield by giving the store a goal to attain each week, along with sharing best practices from Store 2. Store 1’s manager should ensure staffing by hour for each day of week meets the needs of the traffic demand (easily identified using a Daily Store Report), and train staff on conversion and selling skills to improve ATV.
Store 3 should focus on driving conversion. Specifically, it should ensure staffing is aligned to meet traffic demand. Secondarily, the store should identify “magic hours” of success and of opportunity. Reviewing the customer-to-staff ratio will be helpful in identifying specific opportunities.
Additionally, the district manager should praise Store 2 for good results on both conversion and ATV, and determine what drove both metrics and share those drivers with other stores. And, of course, leaders should always develop benchmark goals to continue to drive performance and set the pace for other stores.
You had me at data. There’s no question about it: data-driven decisions have proven to make companies 6% more profitable (Statistic from Harvard Business Review October 2012 Big Data: The management revolution). Before jumping to a potential solution, perhaps from the heart or the gut, always ask yourself and your team, “Show me the data.”
For more information on how data analytics can help your leadership team, please contact your RetailNext account representative or firstname.lastname@example.org.