Understanding Sales Performance Metrics - Part 1
Furniture World Magazine
By Joe Capillo
Calculations that retailers use to measure the effectiveness of their customer interactions, are often misunderstood and underused.
Sales metrics, those calculations we use to measure our effectiveness in dealing with customers, are the most misunderstood and underused measurements in retail furniture stores. Useful benchmark metrics have been created in most other areas of the businesses, yet retailing is the business of selling. In one dictionary definition of “retail” the term “sale” or “sell” is mentioned 5 times, while the words “merchandise”, “delivery”, “facilities”, etc., receive no mentions.
There are reasons for this weakness in our collective operational psyche. Foremost among these is that for areas other than sales we measure the results of impersonal interactions
An example is the relationship between inventory turn rate and gross margin or GMROI. In contrast, selling is a dynamic, interpersonal process. Skills, personal motivations and issues of style are involved. Each interaction on the sales floor is unique. People act in unpredictable ways and all kinds of unknowable influences affect outcomes. Sales measures operate in the realm of human interaction and many managers believe that these interactions cannot be objectively calculated.
A simple idea such as counting and recording the number of shoppers (potential buyers) who come into our stores is considered by most people to be impossible, yet, this is the single most important number in our entire metric universe. Here’s why: If no one ever comes in, none of the other measurements matter. Still, few retailers truly understand all the reasons why it is so important to know exactly how many selling opportunities they have.
The Retail Sales Equation
The equation that defines retail sales is simple. It contains three factors and one result:
Number of Shoppers x Closing Ratio (number who buy) x Average Amount Purchased = Sales
Or, put in furniture industry terms:
UPS x Close Rate x Average Sale = Sales
Retailers have to control or influence three things:
- The number of people who can be persuaded to come to the store to shop.
- The way in which shoppers can be presented with compelling reasons to buy something (sometimes merely by just having it available).
- The sales environment that helps persuade customers to buy more than they originally intended to buy.
Everything we do in home furnishings retailing is governed by this simple, three-part equation.
Revenue Per UP
The terms performance index, return on customer asset and others commonly used in the home furnishings industry, are referred to here as sales revenue per UP. This is the GMROI of sales. Sales revenue per UP is a manager’s number, showing overall effectiveness for the store and for each individual salesperson. This measurement includes the effects of all three factors in the retail sales equation, UPS, Close Ratio and Average Sale.
RPU = Sales Volume/ Opportunities
RPU answers the owner’s question: “How many revenue dollars can I put in the bank every time a shopper enters my store whether they buy or not?”
The RPU number is an important management measurement of overall sales effectiveness. If you take the time to calculate this number (or have a tracking system that does it automatically) by individual salesperson you will see that you are probably providing your least effective salesperson with the same number (or more) of UPS as your most effective salesperson.
Salespeople should not be asked to improve their RPU. They should only be asked to improve the two elements they most influence: Close Ratio and Average Sale.
For example, lets look at the numbers for Marie and Ellen who are salespeople at XYZ Furniture Store.
Marie has 100 UPS, a 20% Close Ratio and a $1,500 Average Sale. The RPU for Marie is $300 calculated as: 100 UPS X 20% X $1,500 = $30,000 Sales. RPU = $300
Ellen, the other salesperson sees the same number of people, has a higher close ratio and lower average sale.
100 UPS, 30% Close Ratio, $1,000 Average Sale. Her RPU is the same as Marie’s: 100 UPS X 30% X $1,000 = $30,000 Sales. RPU = $300
Marie might be given the goal of boosting her revenue per UP by improving her Close Ratio from 20% to 30%. Ellen might be asked to work on boosting her average sale by $500. If Marie and Ellen are successful, both would have 30% Close Ratio and $1,500 Average Sale and total sales would increase by 50% to $90,000 from the current level of $60,000. Our revenue per up would then be $450.
Why Home Furnishings Selling is So Different
The mechanism of selling in furniture stores is different than at other types of retail outlets such as Walmart, the off-the-rack areas of department stores, grocery stores, fast food, convenience and virtually all “big-box” retailers.
Consumers generally have a clear idea of what they want to purchase when they shop for most items. These purchases are, therefore, relatively easy to make. Even clothing purchases, which are very personal in nature, are not a major cause for indecision or self doubt for most consumers. The purchase of an ugly or ill-fitting shirt is usually not a budget-buster.
Likewise, consumers usually have a good idea regarding the vehicle they want to purchase before they enter an automobile dealership. Statistics tell us that Americans make a car purchase on their first shopping trip over 75% of the time.
Furniture is different. First, consumers know virtually nothing about the few national brands that enjoy some name recognition (if you don’t believe this, just ask them). There is little information available to consumers regarding product quality and they know that it doesn’t always follow that “you get what you pay for”. Second, there are far too many manufacturing players for an industry of our size offering a dazzling, but overwhelming and confusing array of products in a few standard product categories. Customers want reasonable selection, but not unlimited selection.
Third, most of our retail customers don’t know specifically what they want in terms of products. That’s because they are almost always working on a room, not an item. They know that their purchase will affect the room’s overall design, but can’t be sure how until after delivery, and then it’s usually too late. Mistakes are expensive and long-lasting. The vast majority of our customers don’t have interior design skills that they trust to be flawless and they know that their choices will be on public view.
The really big difference, however, between home furnishings and almost all other retail categories is that consumers can’t make a purchase in a traditional furniture store (forget IKEA) without interacting with salespeople. Personal selling skills are, therefore, integral to the process of making almost every sale in our industry. If you accept this statement, then you’ll see why the need for personal metrics is central to both understanding the level of performance in your store and taking actions to improve it. Remember the often-heard principle of performance improvement – If you don’t measure it, you can’t improve it.
Skills can’t be directly measured, but the results of the application of skills can be. Fortunately, as shown above, there are only three things we have to measure to know all we need to know: opportunities, closes and volume (to get to average sale).
Consider every customer visit to your store (for any reason) to be a measured UP that is assigned to a salesperson. Included should be: customers making payments; service customers; people who think they’re in a restaurant; individuals making pick-ups; the young couple just showing a recent purchase to “Mom”; everyone who can be positively welcomed, influenced, impressed, served or made to feel special and important by contact with a sales professional.
The reasons for this are simple: Allowing no exceptions leaves no room for interpretation or argument about who is, or is not, a legitimate UP. There is simply one all-encompassing and clear definition with – no exceptions. Second, your salespeople represent you. Getting customers into your store is expensive, so why allow anyone who visits for any reason to go un-served? Your salespeople should overwhelm your customers with high quality, caring service, politeness, knowledge and professionalism. Don’t give up your principles at the front door.
What about fairness to the salespeople? We’ll address that issue in a future article. Fairness is a paramount guiding principle and “cuts” both ways, but if you want to find new ways to improve your revenue, profits, customer and employee satisfaction, you first need to discard old ways of thinking.
Salesperson Influenceon Number of UPS
Most industry members believe that salespeople are not responsible for generating UPS and do not control their UPS. There is broad agreement that this factor in the retail sales equation is due to advertising, a marketing area that is the responsibility of business owners. Experience shows clearly, however, that well implemented follow up by salespeople can bring many customers back to the store who might not otherwise return. Personal customers (those who come back to a specific salesperson on a new project) and be-backs (those who return on the same project) can represent as much as 20% additional traffic.
This group of customers already has a relationship with your store and with a salesperson. They’ve likely had one or more satisfactory experiences with your store and have established a level of trust. They may have available open-to-buy and approved credit. The Close Ratio for this type of customer is 2-3 times higher than for new customers and they have a large lifetime value to your store and your profitability.
You should make your salespeople accountable for managing your customer base and bringing satisfied customers back again and again. Systems must be established and education provided so that salespeople will be able to perform this important function. Manual follow-up index cards, “tickler” files, hand written notes, etc., have been used to great advantage (see “Follow-Up or Fall Down You Decide” from the November 1997 issue of FURNITURE WORLD posted to furninfo.com in the Sales Skill index as well as the “Too Chicken To Ask For Referrals” from February and April 2001). Even better is automated customer management software that automates the process, tracks results and creates the basis for continuous individual and company wide sales improvement.
This three part series will continue with a discussion of close ratios, defining average sale, performance improvement initiatives and begin to explain in detail how to use these and other sales metrics to optimally manage your sales staff.
Joe Capillo is a 41 year career veteran, experienced in managing and consulting with furniture retail operations. He is also a contributing editor for Furniture World Magazine. He is a contributing editor to FURNITURE WORLD and a frequent speaker at industry functions. See all of Joe’s articles on the furninfo.com website.
Read other articles by Joe Capillo