How to determine the effectiveness of a shoe business

Today, most entrepreneurs calculate and analyze their business performance indicators. However, about 30% either do not do this or do not understand anything about it (but would like to understand this issue and start working with performance indicators). Maria Gerasimenko, an expert in the field of fashion business management and development and a regular author of SR, has prepared material especially for the readers of the magazine about what business performance indicators to rely on, how they help, how to calculate and control them so that the profitability of your business does not fall below 10%. After all, as you know, the rule of a bank deposit says: "If your business brings less profitability than a bank deposit, then it does not make sense."

Maria Gerasimenko -

CEO of Fashion Advisers and the first online school for fashion business Fashion Advisers School, expert in business management and development, business coach. Fashion business management experience - more than 12 years. Successfully defended 2 MBA dissertations (Mirbi International Higher School of Economics, Russia, Moscow, 2013) and London Metropolitan University (Great Britain, London, 2017)

Main areas of activity: strategic and anti-crisis management of the shoe business, assortment matrix management, development of motivation programs, conducting trainings in the field of management, service and sales. Clients include: Unichel, Tamaris, s'Oliver, Kotofey, Rieker, Sinta Gamma, Helly Hansen, Rusocks and others.

When I started writing this article, I thought: how the situation has changed in 3 years! Today, I very rarely come across companies whose managers come to me for a consultation without having figures. The ratio of entrepreneurs who monitor performance indicators and make management decisions based on them, relative to those who choose to "play with intuition", has changed.

I conducted a survey of retail business owners in my telegram channel and received the following results:

68% - calculate and analyze performance indicators; 

10% - do not consider performance indicators;

22% would like to start working with performance indicators, but can’t figure them out.

I have prepared this article precisely so that 32% of entrepreneurs finally understand the need to calculate and control performance indicators and thoroughly understand this issue. And those who have already "digitized" their business may gain new ideas for using performance indicators in their business.

What are performance indicators for?

The language of business is numbers. Without planning, calculations and analysis, a successful business is impossible. Every business has a state in which it is now, and there is a goal to which it must come after a certain time. In order to plan the transition from one state to another, we need to describe them with numbers and indicators, and also plan the time frame, resources and investments for such a transition. This is called strategy.

Performance indicators help you understand how accurately you are following the chosen route, what factors can deviate you from the intended path, and what, on the contrary, will contribute to faster completion.

In addition, performance indicators are a common goal that helps unite the team and its efforts. In the event that your employees' salaries are dependent on achieving performance indicators that they can influence.

There are quite a lot of performance indicators in business. There are general business performance indicators, there are separate metrics for each business process and each sales channel. In this article, I will talk about the main financial indicators of business and metrics of retail stores that every business owner needs to analyze. And if you like this article, I will continue the topic in the next issue and talk about performance indicators for the marketing department and the purchasing department.

Key financial indicators of the business:

Net profit and profitability.

The most important performance indicators for the owner. As a rule, a limited circle of people in the company has access to these performance indicators.

Net profit (aka EBIT) - the amount that remains after deducting all expenses, taxes and loan payments.

Net Profit Margin – the main indicator of the economic efficiency of a business, which shows the ratio of net profit to the turnover (revenue) of the company.

Rasschityvaetsya po formula:

Profitability = net profit/turnover * 100%

Gives an understanding of how effective the business is and how much you earn from each ruble invested. In the fashion business, the average annual profitability is normally 13-15%. At the same time, the indicator should not fall below 10%. The bank deposit rule states: "If your business is less profitable than a bank deposit, it's pointless."

2. Gross profit (margin) and marginality.

It is also an important indicator that gives an understanding of how effectively the sales system works in the company. Bonuses of the commercial director, top management, section and regional directors, as well as the purchasing department often depend on this indicator.

Gross profit (aka margin) – this is the company’s revenue minus the cost of goods sold.

Marginality – a reflection of the share of gross profit in the company's turnover, expressed as a percentage and calculated using the formula:

Marginality = gross profit/turnover * 100% 

The standard indicator is >60%.

What does marginality depend on:

Cost of production, pricing, supplier conditions, logistics, timely display of goods in the sales area, visual merchandising, rotation of goods between stores, schedule of promotions and sales.

3. ROI (return on investment) – profitability of investments.

In essence, business consists of constant investments: in marketing, staff training, opening new retail outlets, rebranding, etc. The task of a competent manager is to ensure high return on investment in each area.

For example, if it is marketing, it is necessary to monitor the performance indicators of current campaigns, monitor changes in the behavior of the target audience, keep abreast of trends. The same applies to other areas of investment in the company's development.

Rasschityvaetsya po formula:

ROI = return on investment – ​​investment volume/investment volume * 100%

The standard for this indicator is >10%, the higher the value of the indicator, the higher the efficiency of the investments.

4. Turnover (revenue).

One of the simplest and most open indicators of a company's efficiency. Shows in commodity or monetary terms how much of a product was sold during a certain period.

The indicator can be analyzed both as a whole for the company, retail chain, bush (direction), region, store, and for one seller, 1 square meter of retail space.

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5. Business value.

Some entrepreneurs may be confused at this point and object: "Why evaluate the value of a business if I do not plan to sell it?" Because this is also a metric. And it is one of the main indicators of the effectiveness of company management.

There are different schemes for calculating the value of a business. I will tell you about the method that is more suitable than others for assessing the effectiveness of business management. This is a method of direct capitalization, taking into account the growth rate of the company. That is, with positive growth, the profit, like the value of the company, will increase, with negative growth, it will decrease. In other words, the more profitable the business, the higher its value.

Rasschityvaetsya po formula:

Business Value = Organization Income/Capitalization Rate

The company's income can be obtained from financial statements. Optimally, calculate the average value for the last 3-5 years

Capitalization rate = discount rate - projected income growth rate.

There is no standard for the growth of a company's value year on year. Everything is individual. There are companies with multiple growth, and there are those that are going through a period of crisis. Therefore, the main focus is on the market growth rate. It is impossible to fall below it.

Retail Store Performance Indicators

  1. Traffic

Store traffic – this is the number of visitors who entered. On average, about 10% of the shopping center (TC) traffic will pass by your store, and only 1-2% of the TC traffic will enter it (this is your store's traffic).

What does traffic depend on? Location of the outlet, advertising and promotion effectiveness, shopping centre navigation, cross-marketing, store lighting, window dressing.

Important! Traffic can only be counted using a special counter. Traffic indicators calculated manually are irrelevant.

2. Conversion (CR – conversion rate)

Store conversion – is the ratio of the number of buyers to the number of visitors. Conversion = number of buyers/traffic (number of visitors) x 100%

What does conversion depend on?

Employee skills and motivation (90%), purchasing quality, merchandising, promotions, loyalty program.

The average conversion rate of a store located in a shopping center should be >10-12%.

At the same time, for stores located on the 1st floor and at the entrance to the shopping center, the conversion can decrease to 8,5%. For stores located on the 3rd, 4th and 5th floors, it can be higher by 1%, 1,5% and 2%, respectively. The proximity of a food court and cinemas on the same floor with a store gives the store minus 1% conversion and plus 1,5-2% traffic, respectively.

3. Unit per transaction (UPT)

The complexity of a check is an indicator of the average quantity of goods purchased by one customer.

Receipt complexity = number of units of goods sold/number of customers (receipts)

What determines the complexity of a check?

From the high-quality and efficient work of sellers (80%), the availability of related products, ensuring the availability of inventory in the pool, seasonal events, stimulating complex purchases with the help of merchandising and promotions.

4. Average Purchase Value (APV)

The average bill is an indicator of the amount that one customer spends in a store on average.

Average check = turnover/number of customers (checks)

What does the average bill depend on?

Just like the check complexity, the indicator largely depends on the skills of the sales team. In addition, its result is affected by the cost of the goods sold, the check complexity.

5. Customer loyalty index (NPS - Net Promoter Score)

The loyalty index is a relative indicator that gives an understanding of how loyal your customers are and whether they are ready to recommend your store to other people. The essence of the method is that customers evaluate the quality of service on a ten-point scale.

 NPS = % Promoters - % Detractors

 Promoters – these are loyal customers who rated the quality of service at 9 and 10 points. They are completely satisfied with the service of your store and are ready to recommend it to their friends.

 Neutral - passive buyers who rated the service at 7-8 points. They are quite satisfied with the product and service of the store, but they are not ready to recommend it to others.   

Critics - these are dissatisfied customers who have rated 1-6. They will not recommend your store and will most likely even discourage people from buying from it.

How to analyze performance indicators?

  All of the above parameters need to be analyzed on a regular basis: weekly, monthly, quarterly and annually. And also compared with the indicators of previous periods in the following formats:

• Week/week
• Month/month
• Cumulative total January 1st - current date last year/January 1st - current date this year
• Season/season
• Promotion/action
• Period/period

This type of dynamics analysis makes it possible to evaluate business development, the effectiveness of events, training, promotions and other changes in the company.

To start analyzing performance indicators, you need to purchase traffic counters, install them at the entrance of the store and start surveying customers about their willingness to recommend your store to others. And, of course, keep records of the remaining indicators in a special table.