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| Simple is not always smart |
   
Posted Date: 12/02/2012
By Dennis Price
No doubt you have been told before that it is best to Keep it Simple Stupid (KISS).
No doubt it is sexy advice. But what retailers often do not appreciate is that sometimes simplicity comes at the price of effectiveness.
The real world is complex – and sometimes the response to a challenge is complicated.
When it comes to retail metrics, the same thing applies. We know we need to know what is happening in a business – and often we lean on very simple metrics to tell us what is happening.
Simple metrics
- Daily takings.
- Or net profit for the month.
It’s nice to know. And it is simple, but it is not particularly useful. These metrics don’t pass the Dennis Price ‘so what’ test.
So what if your sales were $5000 yesterday? So what if you knew that it was $4000 the day before?
What can you do about that?
Nothing much, because simple metrics simply don’t provide enough information. Yet, every retailer I know will always be able to tell me what yesterday’s takings were.
You could say it indicates that you should increase your daily takings, and I would argue that you don’t need a metric to know that since you must be doing it anyway.
You can also consider compound metrics, which typically measure productivity in retail.
Compound metrics
- Sales per employee.
- The average sale.
This is better; much better. Compound metrics introduce two variables and if it is a measure of productivity then one variable is an output of the business (sales, profit) expressed relative to the input (time, space, people).
By using these metrics you can drill down better and are able to make more relevant comparisons.
These are good metrics because you can actually take specific actions like firing an employee or increasing the space allocation – and then continue to monitor the metric to assess the impact.
Complex metrics
The most useful metric is a complex metric; like GMROII.
If you knew that for one category of merchandise in your store you are achieving GMROII of 200 per cent instead of 300 per cent, what does that mean and what can you do about it?
(Read this to understand the calculation if you are interested.)
One metric like this reveals a lot:
- GM%.
- Stockturn.
And if you know this, you can also establish if:
- Pricing too high.
- Pricing too low.
- Pricing just right.
- Net sales quantities too high.
- Net Sales quantities too low.
- Net sales quantities just right.
- Cost of Sales too high.
- Cost of Sales too low.
- Cost of Sales just right.
- Average level of inventory too high.
- Average inventory too low.
- Average inventory just right.
And of course, any of combination of the above is possible.
One metric like this suggests a range of different actions you can/ should take, for instance:
- Changing your pricing strategy.
- Have a sale (specific category) or develop a non-price marketing strategy.
- Negotiate with suppliers for better prices.
- Review inbound costs.
- Re-assess your returns policy.
- Buy less/more stock.
- Business as usual.
Of course these options exist anyway, and you may contemplate them from time to time anyway. But, the beauty of it all is that IF you monitored the specific metric, you will know which the right strategy is – and you will be able to track definitively what the impact is.
All the retailers who struggle are the ones with non-existent systems (as I revealed here last week).
A decent POS (not a ‘till’) will cost about two per cent of your annual sales to get a good system implemented across your business.
Considering that…
It pays off over many years to follow and that the ongoing cost is a fraction of the setup cost
and
It can reveal real actionable insights with direct financial benefits:
Why would you not have a good system with accurate data?
A ‘system’ will not improve your business. Taking action on the insights will. Whilst a metric (like GMROII) is a complex metric, it is not difficult to calculate and any decent POS will do it for you. All it takes is five minutes to understand what it means.
Data that is turned into intelligent actions will save time and money and make time and money for you.
Everyone I know can do with more of both.
Making more money is not always simple. Sexy advice is not always good advice.
Have fun – be Retail$mart
Dennis
Dr Dennis Price helps retailers and their retail supply chain to (re-)capture their entrepreneurial mojo with the right skills, strategies and systems to improve business performance.
PS: I made up the typology of metrics simple/compound/complex in this article to illustrate the point. It is not standard industry practice…
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Monday, February 13, 2012 by Dennis
@Stephen: true & thanks
@Rhonda: I understand what you are saying, and it is true.
But worth noting that one could argue that 'daily breakeven' is not just complex, but not really practically calculated. True B/E requires that you know DPP (direct product profitability) and that is VERY complex and difficult.
For instance, if some products take longer to sell to a customer (10min) and some sell easily (1 min) then your wage allocation should reflect that. Most BE calcs would not accommodate those subtleties.
This is very nerdy, but I suppose this article is for the geeks :-)
Monday, February 13, 2012 by Stephen Duncan
Reporting is so critical in business today. I would think that most retailers would like to follow these sound philosophies, but for many part of the challenge is getting the data out of the core system and in a digestible format. This isn’t always going to be straight forward, but certainly worth the investment. Sound advice Dennis
Monday, February 13, 2012 by Rhondalynn Korolak
It depends why you are measuring daily takings in the first place. If a retailer knows their daily breakeven target, they should be measuring daily takings to track their progress. Daily takings may be simple but the underlying measure (breakeven) is complex, practical and powerful. The best time to know that you are not meeting it is TODAY.
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