Key Measure Reporting to Manage e-Retail Business
Key Measure Reporting is the foundation of Retail Customer Metrics and aligning customer performance to business performance. Key Measure Analytics is the stepping stone to understand the levers that retailers can pull to deliver higher customer performance and profits to the business.
It’s incredibly easy to start an e-retail business and government statistics show that there are somewhere between 2 and 3 million e-commerce companies in the world. But understanding how to measure and analyze the business is not always common to most people. There are two major constructs of customer analytics that retailers should know: The Retail Strategic Profit Model and The Customer Transaction Model.
RETAIL STRATEGIC PROFIT MODEL
Gross Margin and Operating Profit
The basic flow of the profit model is that net sales less cost of goods sold delivers gross profits. Variable expenses + fixed expenses deliver the total expenses and the difference between Gross Profit less Total Expenses is Operating Profit. These summations deliver Gross Margin by dividing Gross Profits by Net Sales and Operating Margin by dividing Operating Profit by Net Sales. (Note that Net Sales is Net of Returns). These two figures enable you to see if your business is selling in a space that can cover your costs both fixed and variable: Gross Margin looks at your rate of profit after goods are paid for and Operating Margin looks at the rate of profit after all other expenses are accounted for.
Asset Turnover and Return on Assets
The other component to the Profit Model that is integral to retailers is Return on Assets and Asset Turnover – these are valuations of the ability of the company to generate revenues based on the assets being held. Return on Assets is Operating Profit divided by Total Assets so a business with $2000 in Operating profit and $10000 in Total Assets earns 20% ROA ($2000/$10000). Asset Turnover looks at the Net Sales of the business and divides it by the AVERAGE Total Assets to look at the company’s ability to generate sales off of asset. So a company with net Sales of $50000 and average Total Assets of $10000 would have a 5.0 Asset Turnover Rate ($50000/$10000) which indicates the company is turning the asset base about 5 times a year.
The Customer Transaction Model Enables Insights in Customer Buying Behaviors and Levers
The customer Transaction Model is a series of three metrics that show how a transaction is composed. These three metrics show the “levers” that retailers can pull to drive higher profitability.
- Average Unit Retail (AUR) – AUR is the average selling price of an item on the floor and put into a basket. The price is after discounts for items sold and represents the selling price of items in the basket.
- Units Per Transaction (UPT) – UPT is the average number of units sold in a transaction. The UPT measures the quantity of items a customer purchases and retains (net of returned items).
- Transactions Per Customer (TPC) – TPS reflects the number of transactions a customer has in a set period to show shopping behavior
- Average Dollar Sale (ADS) – ADS shows the average ticket price of the transaction less discounts and returns.
- Net Sales Per Customer (NPC) – Net Sales per Customer shows the customer buying power with the brand over a period of time.
The levers that a retailer can pull to drive sales are Units, Transactions and Price. Increase the basket by a single unit and the overall basket increases in value by the AUR amount. Increase the AUR and the basket increases in size by the change times the UPT. Increase the number of transactions and the customer value changes by the combination of additional units and prices. This relationship is important because it shows the buying power of a customer, the frequency of the customer and the basket composition. Increasing the customer value means getting additional units, additional transactions or higher prices.
Key Measure Analytics Track the Health of Your Customer Base
Whether you have 1000 customers or 100 customers, looking at all customers as “average” is a fairly large mistake. Most retailers do not have the dollars or skills to produce advanced customer personas to measure and understand their business. So a good starting space is a simple Quintile. A Quintile assigns customers to one of 5 groups based on their net sales for the period and sorts them in descending order.
The first step in Key Measure Reporting is to aggregate sales and transaction data to the customer level for the period you want to observe. We advise Key Measure reporting on a rolling 12-month basis to identify trends in the metrics. Table 1 – All Customer Sales and Transaction data shows the data aggregated to customers and then customers ranked in descending order by Net Sales. This gives us five equal segments to look at and enables you to see difference in behavior right away.
1. Operating Profit – 205 of customers are delivering 50+% of the operating profit and 50+% of the sales. The Pareto Rule says that 20% of Customers are 80% of sales; we have found in retail that ratio is more like 30%/70%.
2. Quintile 5 – The other notable figure is that the Quintile 5 group, while having just 2% of Revenues and Profits was still able to move a large number of items which may be an indication of a discount oriented customer capable of clearing inventory to help you increase asset turnover.
The Next Step in Key Measure Reporting is to examine Top Tier customers; this is done by applying another Quintile to the Top Quintile alone. See Table 2: Top Quintile Sales Performance. This is the part that is normally striking to our clients, that just 5% of customers are responsible for $10MM in retail sales and $8.5MM in Net Sales and 40% of the units sold. These customers exist in all retail profiles and the best part about them is that they are small enough to be easily identified in CRM for special treatment. They don’t consume discounts as heavily as others and seem to really enjoy the brand.
Key Measure Reporting Metrics - Understanding Metrics that Drive Behavior
The next two tables are the Key Measures, quick measurements that give rapid insights to your customer file. They are for all customers and of course the top quintile is separated again.
Quintile One – Net Sales per Customer is 161% above the average Net Sales Per Customer on the file, has an 8.4% discount rate that is 17% below the average customer. They have a higher ADS, Higher AUR and a Higher UPT and TPC. The trick with the Top Quintile is that you may not be able to get them to transact at a higher pace than they already are. But if you lose one – you have to get 19 Quintile 5 customers to replace the lost Quintile 1. Now you are seeing where to spend marketing dollars to retain customers.
Even within Quintile One – Quintile 1A is almost TWICE the spend of Quintile1B. The objective of Key Measures is to isolate spending differences, identify profitable customers, find more of them and grow your business while keeping them satisfied and engaged.
Key Measure Reporting is the FIRST step in seeing your business in a new light. Look at the business through the performance of your customers and you will understand the importance of service and access to the business. There are also other telling metrics you can add such as “Brand Duration” – what is the first purchase date on record for a customer and figure out how many days they have been with you and divide that by 365 to get a Duration period. That metric may be key in recognizing when a customer might be ready to defect if your offering becomes stale or no longer relevant to their changing needs.
TBG Marketing is a digital marketing agency with services in retail and e-tail commerce, digital, database and direct marketing. We are a BigCommerce partner and we can help you grow your on-line business by having a deep understanding of how and what your customers buy and why.