Key Metrics for Retail, Catalog, Ecommerce, and Wholesale Organizations-Part #1

Key metrics are a crucial element in the management of any bricks & mortar, catalog, Ecom or wholesale organization from my perspective. The metrics and their values or goals must be developed during the business planning process and then utilized in individual performance plans in order to achieve the plan (Please see blog titled “Six Steps to Achieving Your Business Plan”).  In my practice, I often see a lack of connection and understanding between the business plan, the metrics, and individual performance plans. This creates an opportunity to increase success stories for organizations and individuals.

Key metrics fall into the following categories and should be shared across functional teams with different weighting depending on the impact on the metric by function. The list below includes looks long but really encompasses most metrics utilized to plan and manage a business. Generally, I suggest no more than 4 key metrics for performance reviews:

                Sales and Demand

                Productivity

                Margin and Profit

                Inventory

Let’s begin the discussion with Bricks & Mortar Retail since it’s the most traditional:

Sales

  1. Gross Sales @ Retail-Generally means total sales dollars prior to returns and markdowns.
  2. Returns-Dollar amount of goods returned-often stated as a % of Gross Sales. A benchmark might be a 10% rate.
  3. Markdowns-Dollar amount of the discount a customer receives @ retail-often stated as a % of Gross Sales. A benchmark might be 20% markdowns (which is different than 20% off depending  whether it’s stated as a % of gross or net sales). Sometimes markdowns are taken at the register (POS)and sometimes inventory is de-valued with a markdown prior to being sold.  
  4. Net Sales @ Retail -Gross Sales after of returns and markdowns are subtracted

Productivity

  1. Sales per Square Foot-Gross Sales divided by the selling space (dressing rooms and shoe stockrooms count but other non-selling space does not). This of course varies widely by type of merchandise and store but a rough benchmark like $500-$800 per sq ft gives you an idea. This simply measures the sales productivity of your space and it’s a good way to compare departments within a store or compares stores to each other. You can also figure out what you need the Sales per Square Foot to be based on the amount you pay for rent to insure a good profit.
  2. Sales per Style-Gross sales divided by the number of styles. This gives a benchmark of what the average style produces and is a good metric to review in comparing departments and or when growing or shrinking a category.
  3. Traffic and Conversion- The only way for bricks & mortar organizations to get a true traffic measure that I know of is to use a traffic counter and to record these numbers by day and sometimes by hour over time. This mechanism literally counts the people as they come in the door (hopefully not the employees etc).  If this data is accumulated then one can really compare sales being down 10% to traffic being down 20% as an example. Conversion is the number of transactions divided by the number of customers coming in the door.  In the example above it means that conversion is actually up which is a good thing and may be attributable to better product or better service! These numbers are much easier get in the Direct to Consumer world.
  4. Customer Productivity-Understanding one's customer is key and warrants it's own discussion. In the bricks & mortar world I generally see an opportunity to better capture, understand, and maximize sales through understanding the customer better. 
  5. Average Order Size and Average Units per order- This is net sales(after markdowns) divided by the number of orders. The larger the order size usually the more profitable since logistics costs then become a smaller %. Average Units per order tells you that the average order size of $150 is made up of 2.5 items per order.
  6. Average Unit Retail – Net Sales (after markdowns) divided by number of units sold. It’s a good metric to compare categories (ie average sale of a top versus a outerwear piece or a fishing rod with a piece of tackle). This really tells you what your customer is willing to pay for an item. They might be willing to pay $100 for a jacket and $50 for a top. Note: Sometimes organizations calculate the Average Unit Retail of on hand inventory which is not apples to apples with this figure because of markdowns.  In the above example a jacket might be $120 and the top inventory may be $60.

Margin and Profit

  1. Initial Markup Percentage (IMU%)-(Retail of an item-cost of an item divided by the retail of an item-($10-$4/$10=60%)). This is the mark up that buyers are most focused on when buying product and building an assortment. 60% might be a rough benchmark.
  2. Gross Margin Percentage (GM%)-This is the margin after discounts (merchandise markdowns + marketing discounts) ie the margin when something is sold. Sometimes referenced as maintain margin or final margin.
  3. Cost of Goods Sold (CGS)-This is exactly what is says which is nice. It is the inverse of Gross Margin. So in the example above $6 is the Gross Margin or Gross Profit then $4 is the inverse or cost of the goods.
  4. Operating Margin $/%-This generally refers to margin after all direct expenses of buying and selling the product have been taken into account. This would be GM% less any direct expenses such as advertising expenses.
  5. Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA %)-This is the “bottom line” profitability of a business that many managers are rated on.  A Profit & Loss statement begins with Sales, subtracts cost of goods sold to get to Gross Margin and then subtracts S,G & A expenses such as staffing, warehouse etc  to get to EBITDA. I think many businesses would be happy with a 10% EBITDA as a very rough benchmark.

Inventory

  1. BOM and EOM-Beginning of month inventory usually stated in units if you are working with styles and stated in dollars if working at the product category level. End of month inventory is the same.
  2. Average Inventory-This is usually stated in dollars for a product category or a total company and is an annual metric. Add together the first month’s BOM plus 12 months of EOM’s and divide by 13.
  3. Turn-This is the rate you “turn” the inventory (like tables in a restaurant). Sales divided by average inventory. This should be apples to apples whether you are on a cost basis or retail basis. Ideally gross sales (net sales + markdowns) would be used but if you don’t have gross you can use net. This is also an annual metric and often compared across companies as a key metric. A benchmark for an apparel company might be a 4 turn.
  4. WOS and DOS-Weeks of Supply and Days of Supply measures how much inventory is on hand at a given time, usually month end. Inventory divided average sales by day (usually the forecast going forward for internal mgmt purposes).
  5. Sales/Stock Ratio or Stock/Sales Ratio- This is simply as stated. I tend to utilize turn annually and then WOS and/or DOS by month at the category level becaise I think it means more.
  6. Sell Through Percentage-This metric is often used more at the item level than at total category level and is key in reacting to business. It is the sales divided by the original on hand. As an example we initially had 100 rice cookers and at the end of the first week we sold 15 which is a 15% sell through-not too bad. The second week we started with 85 and sold 10 which is a 12% sell through. At the end of the first month we sold 40 which is a 40% sell through and now we have 60 left. If something isn’t selling at 10% per week perhaps a markdown is needed or conversely if it’s selling 25% per week then maybe we should get a re-order assuming it’s not seasonal or no longer the fashion.
  7. Gross Margin Return on Investment (GMROI)- This is gross margin dollars (often for a year) divided by average inventory. This measures the marginal profit as a return of the inventory $ invested. A number like 350% or 3.5 is GMROI.

Now let’s talk about the nuances of the Direct to Consumer Catalog Business:

Sales

  1. Demand-Catalog begins with Demand vs Sales. Demand measure the demand for an item even if it’s out of stock and the customer did not get it. This is easy to do in the Catalog world, not really done in the bricks and mortar world. ECom and wholesale often try to capture.  This is crucial to know in planning for the future and also for understanding customer satisfaction.
  2. Forecast Accuracy-First of all we all know that it’s always wrong to a certain degree! This is often a key metric for those who forecast but also for those who mange the inaccuracy. Hopefully, the “overs” and “unders” are added together instead of being netted against each other.
  3. Percentage Complete-In the Catalog world everyone needs to know if a book is 90% complete in demand or only 20% or 50% because the final number can change.
  4. Fulfillment-This measures how much of the demand the organization is able to fulfill for the customer and is a key metric of customer satisfaction as well as converts demand to sales. fill rate is another term for the same thing. Often two metrics are measured. Initial fulfillment and final fulfillment which measures the fulfillment after a customer waits for a period of time to get their merchandise. Anything that can’t be fulfilled is a sold out. As always, benchmarks depend on the business but 90-95% often seems to be the target for fulfillment.
  5. Now apply the same metrics above for sales to Catalog.

Productivity

  1. Circulation and Conversion-Circulation usually refers to how many customers are sent a catalog. Perhaps a good examples is that 3,000,000 people were sent the fall catalog (the aging or quality of those customers is another discussion). Let’s say that 150,000 actually responded or bought something, equaling a conversion rate of 5% (3,000,000/150,000) which is pretty good in the direct to consumer world.
  2. Customer productivity-Customer productivity is a key element in the Catalog world which again warrants  it's own discussion. This data is easily captured in the Direct To Consumer world. Generally Catalogers segment their customer "file" into categories by frequency of purchases and net sales. This is used for circulation planning and when it goes down to the category level utilized specifically for merchandising directly to the customer.
  3. Factor-Factor measures the productivity of the items on each page in that particular catalog. In the same example above let’s say that of the 150,000 people who actually bought something on average they each spent $100 so the total catalog generated $15,000,000 in demand. Let’s also say that each catalog was 120 pages so on average one page generated $125,000 in demand. If a popular outfit on a page generated $250,000 then the factor of that page or outfit equals 2 ($250,000/$150,000).
  4. Demand Per Thousand Pages Circulated (DMPC)-This is my favorite productivity measure. This measures the demand divided by (# of pages in a book (or portion of a page) times the total circulation of the book then divided by 1000). This is a wonderful productivity measure because it enables you to compare productivity book to book and also item or category to each other in one book or across books. (Factor does not).  In the example above a jacket is pictured in ½ of a page. It generated $75,000 in demand. $750,000/ ((.50 x 3,000,000)/1000)=$50 DMPC which compares to the total book @ $41.67. It also compares to a t-shirt that generated $60,000 in demand on a ¼ page @ $80 DMPC.
  5. PMPC-This metric is exactly the same as above but profit/margin is utilized instead of demand which enables you to directly measure the variable profit of an item, page or book.

Margin

  1. All margin metrics are the same for Catalog as the Bricks & Mortar section

Inventory

  1. All inventory metrics are the same for Catalog as the Bricks & Mortar section but certain metrics such as sell through don’t mean as much in this business.          

Part #2 will talk about Ecommerce and Wholesale