At no time of the year are your retail sales efforts more important than during the holiday season. Understanding key numbers is the first step to boosting retail profits. While the calculations are pretty straightforward, they can give powerful insights into your most effective retail strategies.
Retail sales can contribute to your bottom line on a daily basis. There are six “need-to-know” numbers or Key Performance Indicators (KPIs) that will keep you on track and help identify where you can maximize your retail profits. Why is retail so important? Simply put, your retail profit margin (the amount you make over and above your costs) is higher than service sales. Providing a service includes labor cost, supplies, and overhead, leaving you with a profit margin often in the range of 20%-35%. With retail products, your profit margin can easily be 50%-60% or more depending on the items you sell and how you price them.
But how can you tell if you are maximizing your retail “shoppertunity”? It’s all in the numbers. These KPIs are easily accessible as a report from your salon software program. No software? No worries! You can calculate these numbers with a pencil, paper, and a calculator. They will give you a snapshot of your retail performance for a day, week, month, quarter, or year.
To get started, you first need to assess where you are today. You can’t make improvements until you have an idea of where you currently stand. Wishing and hoping are no substitute for knowledge and planning. Recalculating and monitoring your KPIs will give you a way to measure your progress.
A Case Study
Let’s calculate and use the KPIs for a single day of sales at Lily’s Nails. Lily, the owner, and staff member Jeni book an average of 15 clients a day. As retail items, they offer polishes, nail tools, some jewelry, and a few accessories. At the end of the day, Lily is often disappointed to find a steady service volume but few retail sales. She wants to grow her retail business but feels stuck at the prospect of selling to just a few clients a day.
To help Lily identify where she is today and how to improve, we need three critical numbers to start:
1. Total Retail Sales. Identify all retail sales for the day. Deduct any product returns. If you sold any product at a discount, identify the discount amount and the actual selling price of the retail item. Record your adjusted retail sales total.
2. Service Sales. Next calculate your total services sales. Remember to identify any discounted services and the amount of the discount. Record the adjusted service sales. Remember that gift certificates are not sales. They are not retail items or service income because gift cards or certificates are a liability on your books until they are redeemed for either goods or services. They count as sales only upon redemption.
3. Appointments. Record how many booked and completed appointments you had. Because a single appointment may represent several services, it is important to know both your service income and the actual number of completed appointments.
Lily’s Nails Numbers for the Day:
Total Adjusted Retail Sales: $77 (total sales were $80 with one $3 discount)
Total Service Sales: $1,020 (there were no discounted services)
Total Appointments: 15
With these three key numbers we can now calculate Lily’s retail KPIs.
Doing the Math
1. Retail Sales-to-Service Ratio. This is a percentage of retail sales to service sales. Divide the total retail sales by your total services sales.
Lily’s Nails overall ratio is 77/1020 = 7.5 %
Use this ratio to track the retail and service sales of your staff as well as the overall business. This calculation works for full- and part-time staff. Small increases in the sales-to-service ratio will bring additional revenue to the business as the number of sales grow.
Jeni, Lily’s staff member, sold $40 in retail. Her service sales were $400. Her sales-to-service ratio for the day is 40/400 = 10%
2. Average Retail Purchase. What does each client spend on average on a retail purchase in your business? To answer this question, divide your total retail sales by the number of tickets that have a retail purchase. This includes anyone who solely purchased a retail product without a service.
Five clients made purchases totaling $77. The average purchase today at Lily’s Nails was $15.40 (77/5 = 15.40).
3. Cost of Goods Sold (COGS). When you purchase retail products for your business, you record the actual price that you paid for the item. That is the cost of goods sold, or COGS. It plays an important role in determining how you price your retail items. Other factors to consider include shipping charges and commission. Your software program may be able to provide a report of the COGS and commission.
The total retail value of the goods sold today was $80 before the discount. The cost of those items was $40 not including any shipping costs or commission. This is a 50% (40/80) mark up.
Tip: Discounting retail product changes your profit margin but not your cost of goods sold. Be aware of discounting too often or too much.
4. Retail Commission Rate. If you pay a commission on retail sales, it adds to the true cost of your retail items and impacts your profit margin. Commission can be an important incentive to increasing retail sales, but you have to account for it in your sales and pricing strategy.
Jeni receives a flat 10% commission on any retail products sold. As the owner, Lily does not take any commission. Jeni earned $4 in commission today.
5. Average Retail Sale Per Appointment. Not every appointment results in a retail sale, but calculating your average retail sale per appointment will give you a picture of how much each appointment generates in retail revenue. This number will be lower than the average retail purchase because you are looking at all your appointments.
Lily’s nails completed 15 appointments today. The average retail sale per appointment was $5.13 (77/15).
6. Shrinkage Rate. Shrinkage is the percentage of retail inventory that goes missing or is unaccounted for after a physical inventory. Investigate where any missing inventory has gone. Lost inventory is lost revenue.
Lily’s Nails does not take a physical inventory. She relies on her computer software report.
Putting the Numbers to Work
What can Lily’s Nails do today to use these KPIs to drive additional retail sales?
1. Jeni, the staff member, sells more on average than the salon overall. Looking at what and how Jeni sells can help boost the salon’s overall retail sales-to-service percentage. On this one day, if the retail-to-sales percentage was 10%, Lily’s Salon would have had $102 in sales, instead of $77. On a daily basis that adds up.
2. The average retail purchase is $15.40. Review what the top-selling products are. Recommend them and create a display. Place small items for impulse buys at the front desk. Nudging this number up a little each day will pay off. You may consider adding some higher-priced items to the mix. Displays and visual merchandising create interest and more sales. Review your product discounts, as even small discounts can minimize your profit margin.
3. Lily is marking up her retail products by only 50%. She is not considering shipping or commission in her pricing strategy. Lily should review her retail pricing and make adjustments to cover these costs. This will bring Lily’s Nails more revenue from each purchase.
4. Every appointment is a chance for a retail sale. If more appointments result in a sale, the average amount per appointment will rise. Create a list of product recommendations for each service from nail files to cuticle oil. Never miss the opportunity to recommend a retail product to improve results between appointments.
5. Don’t rely on your software reports alone. Take a physical inventory every month to identify if you are losing valuable retail products through theft, wastage, or disposal of out-of-date products. Follow these easy tips to reduce shrinkage:
> Do frequent spot-checks of your retail inventory against your report or last month’s audit.
> Store extra inventory in a safe, locked storage unit or cabinet.
> Reduce temptation by not having too many small items or too much inventory out at one time. There is a difference between display and storage.
Patti Biro is the owner and founder of Patti Biro and Associates (www.pattibiro.com), a consulting firm specializing in planning and providing innovative coaching and education in the spa and wellness industry.