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7 retail KPIs every business owner should know

7 retail KPIs every business owner should know

Whether you run a bricks-and-mortar shop, an eCommerce site or both, getting a grip on how your retail business is performing is key to pulling through. Luckily, a whole range of retail KPIs (key performance indicators) exist for you to track performance on everything from sales, to customer retention and inventory.

In this post, you’ll find some useful retail KPIs to better inform your business decisions.

We’ll explore:

1. Conversion rate

2. Sales per square foot

3. Sales per employee

4. Average transaction value

5. Customer retention rate

6. Sell through rate

7. Inventory turnover

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What are KPIs in retail?

A KPI in retail is a measure of how effectively you are achieving your business goals. They measure performance through varying data points, giving you a clearer picture of how your marketing, staffing and merchandising is paying off, as well as where you might be spending too much money and where you can improve.

Put simply, failing to make use of retail KPIs is the equivalent of running your business with your hands behind your back. So let’s look at a few. 

1. Conversion rate

Conversion rate is an essential KPI for retail, either online or in store. By indicating how many customers—out of all those that visited your shop or website—actually bought something, it tells a bigger story than transactions can on their own.

In store, conversion rate can tell you about the effectiveness of your visual merchandising and customer service in motivating customers to buy.

Online, it tells you how well you’re nurturing customers at different points in the sales funnel, as well as measure the ROI of your ad spend and email marketing.

How to calculate conversion rate

To calculate conversion rate, you first have to determine a time period you’d like to measure. Say you changed your store layout a month ago in a bid to optimise sales. In the space of that month, eight hundred people entered your shop. 

You consult your retail ePOS back office and find that you processed six hundred and forty transactions in the same time period. To get the conversion rate, simply divide the number of transactions by foot traffic.

Conversion rate = (number of transactions/footfall) x 100
Conversion rate = (640/800) x 100
Conversion rate = 80%

Calculating conversion rate online

Calculating conversion rate for your webshop is slightly different. Since you don’t have any customers physically walking into your store, the equivalent metric would be website traffic: how many people have visited your website in total. For eCommerce in 2020, the average conversion rate was 3%.

Let’s say you updated your website design 3 months ago to get more traffic. You’d like to gauge the effect the redesign had on conversion. Your store had 12,000 visitors in that time period, and 2,000 conversions.

If you’re using Lightspeed eCommerce, you can look at the Transaction Status report for an overview of all your conversions over a selected timeframe.

Conversion rate = (number of conversions/site traffic) x 100
Conversion rate = (2000/12000) x 100
Conversion rate = 10%

Sales per square foot

Sales per square foot captures how efficiently you make use of available space in your bricks-and-mortar retail store. 

It varies according to the size of both your retail space and that of the products you’re selling. For that reason, there’s no such thing as an ‘ideal’ sales per square foot.

Historically, the higher your sales per square foot the better. But as omnichannel retail takes centre stage in 2021, sales per square foot is becoming less indicative of a businesses success since it only measures sales made in a bricks-and-mortar location, not online.

However, for businesses that use their bricks-and-mortar location as experiential retail spaces or promotional devices—physical spaces where customers can interact with your products—sales per square foot is still a relevant metric. 

How to calculate sales per square foot

The formula for calculating sales per square foot is fairly simple. You’ll first need to select a time frame you’d like to measure and get the total value of sales revenue during that period.

Let’s say you’d like to measure your sales per square foot over the holiday period in your 50 square foot shop. This data should be readily available in your retail ePOS system. If you’re using Lightspeed Analytics, you can easily grab this data using the Recent Sales report.

The cash value of your total sales revenue for the holiday period is £700,000. Divide that number by your total retail space by square foot.

Sales per Square Foot = Total sales revenue/square foot
Sales per Square Foot = £700,000/50
Sales per Square Foot = £14,000

Sales per employee

Sales per employee helps measure staff performance over time, making staffing more efficient and allowing retailers to fully utilise their most skilled and experienced staff.

High sales per employee shows that your business is able to sell more with less staff, therefore keeping your overhead costs low and profit margins high.

How to calculate sales per employee

Let’s say your sales revenue from the last two years was £3,600,000. During those two years, you employed a total of 14 staff.

Again, the formula for calculating your sales per employee is fairly straightforward. Divide your  sales revenue over the specific time period by the number of employees during that period.

Sales per employee = Sales revenue/number of employees
Sales per employee = £3,600,000/65
Sales per employee = £55,384.50

Getting a sense of how your employees are performing is essential for protecting your business’ bottom line. Using Lightspeed Analytics, you can track the individual sales performance, upsell percentage and customer capture rate through detailed reports.

Average transaction value

If you’re pumping money into advertising and marketing campaigns to boost sales, a hike in Average Transaction Value measures the success of those efforts in terms of ROI. It shows retailers how much, on average, customers are spending with each purchase.

Say you’ve recently rolled out a social media campaign, creating a buzz about your business online. Measuring average transactions both before and after these events will give you a sense of their impact. 

How to calculate average transaction value

To get your average transaction value, calculate the total value of your transaction within a designated time period, then divide that by the total number of transactions during the same period.

So let’s say for the last 6 months, the total value of transactions came to £800,000, with a total number of 3840.

ATV = total transaction value/number of transactions
ATV = £800,000/3840
ATV = £208

Customer retention rate

Customer retention is the act of keeping individuals as customers who repeatedly purchase from you after they convert the first time.

You don’t want every customer out there to discover your product, think it’s great and only purchase once. You want repeat customers who come back again and again, and who love your brand so much that they’ll sing your praises to their friends and peers, too.

You want your retention rate to be as high as possible. This not only ensures maximum profitability, but also lets you know that your marketing is sound, the quality of your product or service is strong and that you’re targeting the right people with your communications. 

How to calculate customer retention rate

When calculating customer retention rate, you’ll need the following information: 

  • The number of customers at the start of a period (S) 
  • The number of customers at the end of a period (E) 
  • The number of new customers acquired over the same period (N)

With that information ready, use the following formula to find your retention rate:

Let’s say your average customer makes a purchase at least three times per year. You decide to use a year as your standard length of time.

At the end of a year, you saw that you had a total of 400 customers, and that 200 of them were new users. You started the year with 310 customers. 

That equation would look like this:

Customer retention rate = ((400 – 200) / 310) x 100
Customer retention rate = (200 / 310) x 100
Customer retention rate = 0.64 x 100
Customer retention rate = 64.5%

For that year, your business had a 64.5% customer retention rate. Not bad!

Sell through rate

Inventory sell-through rate measures the amount of inventory a retailer sells in relation to the amount they purchased from a manufacturer. Retailers use it to estimate how quickly they can sell a product and convert their initial investment into revenue.

Retailers can calculate sell-through rates by product type, product category, brand or any other category they choose from their retail POS system. Calculating the sell-through rate for any of these categories tells you whether or not investing in products (and what type of products, if you want to get that specific) from that manufacturer yields a fast ROI.

A high sell-through rate indicates that a retailer sold the inventory quickly in a given time period. Moving inventory fast and at full markup keeps gross profit margins as high as possible.

Formula for calculating inventory sell through rate
A low sell-through rate is an indication that a retailer isn’t selling those products as quickly as they expected. Inventory that doesn’t sell fast risks needing to be discounted, which impacts profit margins and lowers your ROI.

How to calculate sell through rate

Sell through rate is calculated by dividing the number of units sold by the number of units received, then multiplying the sum by 100. 

Most retailers calculate sell-through every 30 days. After 180 days of sitting on shelves or in the stockroom, that product is considered dusty inventory and should be discounted and sold to make room for new, seasonally relevant products that can be sold at full price without a discount. 

Let’s say an apparel retailer buys 100 units of a specific brand of sweater. Within a month, the retailer sells 75 units. To calculate that sweater’s sell-through rate, the retailer does the following:

Sell-through rate = (75 / 100) x 100
Sell-through rate = 0.75 x 100
Sell-through rate = 75%

Inventory turnover

Inventory turnover is an indication of the rate at which merchandise flows in and out of your store or webshop. It demonstrates how efficiently you’re meeting customer demand and securing a healthy ROI.

A good inventory turnover comes from effective stock control, as well effective marketing and pricing of your products. To calculate inventory turnover we need two additional formulae: 

  • COGs = (Beginning Inventory + Purchased Inventory) – Ending Inventory
  • Average Inventory – Beginning Inventory + Ending Inventory / 2

Let’s say you’d like to calculate your inventory turnover for the first quarter of the year. First, you’d start with COGS. 

At the beginning of the quarter, your inventory was worth £15,000. During the course of that quarter the value of your purchased inventory was £60,000. At the end of the quarter your inventory was worth £17,000. To get your COGs to the following formula:

COGs = (Beginning Inventory + Purchased Inventory) – Ending Inventory
COGs = (£15,000 + £60,000) – £17,000
COGs = £58,000

Now to calculate your average inventory, add your beginning inventory to your ending inventory and divide by two:

Average Inventory = Beginning Inventory + Ending Inventory / 2
Average Inventory = £15,000 + £17000 / 2
Average Inventory = £23,500

Now we have these two figures, we can calculate inventory turnover by dividing them.

Inventory Turnover = COGs/Average Inventory
Inventory Turnover = £58,000/£23,500 = 2.4
Inventory Turnover = 2.4

Retailers should be aiming for an inventory turnover of between 2 and 4. Any lower than than that, and it’s an indication that your products aren’t selling at the rate you’d expect them too, either because you’re failing to forecast demand and buying too much stock or that you’re not investing enough in staffing or marketing to get customers to buy.
On the other hand, if your inventory turnover is too high, it may mean that you’re buying inventory too often in small quantities. This could fail to meet customer demand and negatively affects sales. When it comes to inventory turnover, you should find a balance between meeting customer demand and maintaining a healthy ROI.

Get the tools to measure success.

Keeping tabs on the many aspects of business performance is important for running a profitable business. 

Now more than ever, having access to business data can help you drive your business forward into the future. Want to know how Lightspeed can help? Let’s talk.

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