Friday, July 17, 2009

Key Performance Indicators (KPI) in retail industry

Key Performance Indicator (KPI): Definition

Key performance indicators are those financial and non-financial or metric that are used to evaluate the growth of the organization (i.e.) how successful it is. On most cases Key Performance Indicators (KPI) is used in a long term organizational goals. Key Performance Indicators (KPI) helps a retailer to analyst the mission, identify the stakeholders and define the goals. The Key Performance Indicators (KPI) is also known as Key Success Indicators (KSI).

The Key Performance Indicators (KPI) is used in any fields such as schools (Graduation rate, Success in finding a job after graduation), Social service organization (Numbers of clients they are holding) and more. The Key Performance Indicators (KPI) for an organization would be Pre-tax profit, Share holder equity and more. The Key Performance Indicators (KPI) does not change often. It changes only when the goal is changes. They focus on what they are? and how they are measured?. The act of monitoring KPI is known as Business Activity Monitoring (BAM). KPI is basically associated with the organization strategy and concepts such as Business Scorecard.

What are the basic KPI a retailer should adopt?

Not all the retailers adopt the same kind of KPI to meet the organizational goals. But having certain KPI in an organization has become mandatory for a retailer. There are certain basic KPI to adopt by a retailer are such as,

  1. Sales – annual turnover, transaction made, basket spend, footfall - all against LFL and budget

  2. Loss prevention – Shrinkage loss, (stock loss or cash loss)

  3. Operational – availability, inventory integrity

  4. Salary

  5. Service – Complaints that are made

  6. HR development – training, coaching, staff turnover

  7. Variable costs – any expenses made at an additional cost are avoidable

How does the KPI helps in increasing your sales?

Once the KPI is defined it gives the clear idea about the goals and the measure and finally what to do with them? It gives a clear idea what is important in the organization and for what they have to work for to achieve. The KPI can be used as the performance measurement tool. It helps in managing the performance of the organization. Also make sure that everyone exceeds or meets the KPI. There are many KPI set by retailers in order to achieving in their business. Giving a vague KPI such as “Should have repeat customers” will not help you to meet the organizational goals. The best KPI would be “Employee Turnover” which you help you in calculating the performance of an employee.
There are five top most KPI are set by the retailers such as,

  1. Sales per hour – Statically compares one sales person with the other and determines who is efficient in selling and attending the customers.

  2. Average Sale – Statically compares the average selling price of a sales person. The higher statistics shows that the person has a wide knowledge on the product and the less statistics reveals that he lacks in the product knowledge or effective description.

  3. Items Per Sale – determines the ability of a sales person compare to sale.

  4. Conversion Rate – shows how many customers they have made from the visitors of the store.

  5. Wage to Sales Ratio – gives a graph comparing the hourly wages of a sales person to hourly sales they have made. This KPI determine their performance level and how effective they are.

Calculating KPI in retail industry

Retail Customer KPIs

  1. Customer GROSS Profit = Customer Sales - Customer Cost of Goods Sold for a period

  2. Customer Lifetime Purchase Value - Monetary value of each customer's life time purchases from the retailer

  3. Customer Profitability = Customer Sales - (Customer Returns - Customer Cost of Goods Sold + Customer Promotion Expenses + Activity Based Cost of Servicing Customer) for a period

  4. Customer Purchase Freq Count - Count of customer purchases transactions over a period of time

  5. Customer Purchase Value - Monetary value of each customer purchase during a period with an average value for all purchases for the period

  6. Customer Reference question - A rating from 0 to 10 that indicates if the customer would recommend the store.

  7. Customer Sales by Segment - This formula is dependent upon defining customer segments (based on age, education, lifestyle, income and other factors) and associating individual customers to specific segments.

  8. Customer Service Staffing = Face to face customer service staff count / total staff count

  9. Visit to Buy Ratio = Sales Transaction Count per period / Visit Count Per Period

Retail Financial KPIs

  1. Accounts Payable Turnover = Avg Accts Payable / (Cost of Sales / 365)

  2. Accounts Receivable Turnover Days = Avg Accts Rec / (Credit Sales/365)

  3. Acid Test Ratio = (Current Assets - Inventory)/Current Liabilities

  4. Admin Cost % = (Administration Costs / Sales )*100

  5. Average Inventory = (Beginning of Period Inventory + End of Period Inventory)/2

  6. Break-even ($) = Fixed Costs / Gross Margin Percentage

  7. Cash Conversion Cycle = (Days Inventory Outstanding + Days Sales Outstanding + Days Payable Outstanding)
  8. Contribution Margin = (Total Sales - Variable Costs)

  9. Cost of Goods = (Retail Price – Markup)

  10. Cost of Goods Sold = Beginning Inventory + Purchases - Ending Inventory

  11. Current Ratio = Current Assets / Current Liabilities

  12. Ending Inventory At Retail = Beginning Inventory - (Sales + Transfers out + Return to Vendor + Markdowns + Employee Discounts + Shrinkage) + (Purchases + returns from Customers + Transfers In + Markups)

  13. Gross Margin = Total Sales - Cost of Goods

  14. Gross Margin Return On Investment = Gross Margin $ / Average Inventory Cost

  15. Initial Markup = (Expenses + Reductions+Profit)/(Net Sales +Reductions)

  16. Interest Cost% = (Interest Costs / Sales)*100

  17. Inventory Turnover = Net Sales / Average Inventory

  18. Maintained Markup $ = (Original Retail - Reductions) - Cost of Goods Sold

  19. Margin % = (Retail Price - Cost) / Retail Price

  20. Markup % = Markup Amount / Retail Price

  21. Net Receipts = (Purchases + Transfers in + Returns from Customers + Overages) - (Transfers Out + Return to Vendors)

  22. Net Sales = Gross Sales - Returns and allowances

  23. Retail Price = Cost of Goods + Markup

  24. Return on Capital Invested = (Profit for the Year / Capital Employed)*100

  25. Sales per square foot = Total Net Sales / Squarefoot of selling Space

  26. Stock Turnover Days = Average Inventory / (Cost of Sales /365) number of days

  27. Total Asset Sales Ratio = Sales / Total Assets

  28. Turnover = Total $ Sales for season / Average $ Inventory for season


  1. Thanks a lot!! Much needed info

  2. Can you please provide sources for this information? Great post, I just need a little more hard resources rather than a blog website. I appreciate the posting and any additional information you can provide.



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  8. Hi, Can anyone please help me with templates/forms/examples of KPIs for FMCG industry.

    1. Hi Kumar Archit, I am an operations improvement consultant and can help you customize templates as per the growth 'gaps'. Please contact me :; thanks, Sandeep

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  11. where can u find industry average statistics ?

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  24. Thanks for this post, very helpful.

    If I may add these two important metrics:

    - Target Achievement for period.

    - Sales Growth, current year compared to previous years.

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  27. KPI's in retail industry help a lot in crafting a marketing strategy, nice informative post, thankyou!

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  31. Interesting post, but mere noting down KPIs and working on improving sales isn't the only thing that retail industry should focus on. A major part of the retail profit is neutralized by the cases of shoplifting, employee theft, and sweethearting, which cause a loss of hundreds of billions of dollars to the industry every year.
    There is a solution to this menace, Retail Surveillance, where the monitoring staff audits and monitors stores regularly and reports any case of theft, negligency, or misbehavior in the store. Investing in a retail surveillance service can help in theft prevention as well as improve staff behavior, optimize operations, and help improve on profits.

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