Benchmarking: How Am I Really Performing?
Written By: James E. Dion
Published On: June 2006
What Is Benchmarking?
Do you remember when you were in grammar school or high school, and at the end of every semester you received your "report card"? Some dreaded that day and some welcomed it! Either way, it was the method that the school used to tell us and our parents how well (or not so well) we were doing in our job of getting an education. The report card was really just a benchmarking report! Benchmarking, as defined by the dictionary, is "a standard against which something can be measured or assessed." But it is actually much more than the dictionary definition suggests.
All of us wonder how we are really performing: Are we doing a better job than others? Or are we not doing as well as others? Most importantly, are we doing the best we can be doing? It is a natural and proper question to ask, and the answer to the question is contained in our report card. And just like in school, that report card helped us to focus on what needed improvement. In school, however, we often had only five or six subjects that we were graded on. In our retail business, we can easily find hundreds of "subjects" that we can be graded on, but to try to measure all of these is not only impossible, but also very foolish.
Almost every category of retail today does some benchmarking, including the National Sporting Goods Association (NSGA), the National Jewelry Association (NJA), the National Shoe Retailers Association (NSRA), and many more. These associations recognize that giving their members benchmarks to strive for helps the entire industry. As independent retailers, we often do not have a large head office to set our objectives and plan our business. We are the head office! Benchmarking is like having a large corporation behind us: it gives us direction and helps us do what we need to do.
What Does Benchmarking Do?
Benchmarking simply means that we measure our performance against a standard. This standard can be almost anything, but it is much more meaningful if we measure our performance in relation to our peers, and to other stores of similar size and type. Benchmarking gives us a goal to achieve. It helps us focus our day-to-day work on the important things that can help our business. The key thing to remember is that the end product of benchmarking is happy and satisfied customers and staff.
Why Should I Do It?
The most compelling reason to benchmark our activities is that it will help us be better retailers. This will help us improve our customer service and our sales. We have an obligation to do as well as we can, so that the store does not just survive but thrives.
What Do I Benchmark?
So what benchmark measures should we consider? As we said, there are hundreds of choices available, but in reality there are only a handful that can make a real change in our business. Another thing to remember is that benchmarks are often not absolute numbers. For example, imagine if we told you that a good sales benchmark is $900,000. What would that tell you if you were operating a small store with only 800 square feet of selling space? It is almost impossible for a store that size to achieve sales of $900,000! A more realistic number for an 800-square-foot store would be sales of $400,000. So using the total sales number is really not a very good idea. A better way is to make the measure more fair is by using sales per square foot. This benchmark equalizes performance no matter what size the store is.
The best benchmarks to use for independent stores are the following:
- average transaction (AT)
- items per transaction (IPT)
- conversion rate (CR)
- sales per square foot (SPSF)
- inventory turnover (IT)
- sales per employee (SPE)
All of the above benchmarks (measures) are directly related to productivity—that is, our ability to do more with what we have. We have a saying in retail that "what gets measured gets done." If you're not aware of and measuring your store's productivity, then—surprise, surprise—it doesn't increase! For almost every store, the first thing we should focus on and improve is selling more of what we have, to the customers we already have. The first three productivity benchmarks mentioned above are the most powerful tools that we have in retailing: AT, IPT, and CR. The other three measures are also very critical, but they only make real sense when we look at them over a twelve-month period.
How Do I Start?
The first three measurements need to be looked at every day. Make your staff aware of the figures. Then, set goals and have employee contests to increase these figures. To calculate your AT, you simply take your total sales for the day (excluding sales tax), and divide the total sales dollars by the number of transactions. For example, if your sales for the day were $820 and you had 50 transactions, your AT would be $16.40 ($820 divided by 50).
To calculate IPT, take the total number of items sold for the day, and divide by the number of transactions. For example, if you sold 200 items and you had 50 transactions, your IPT would be 4 (200 divided by 50).
To calculate CR, take the total transactions for the day, and divide by the number of customers who entered the store. For example, if you had 50 transactions, and 300 customers entered the store, your CR would be 16.6 percent (50 divided by 300). CR tells us how many shoppers we turn into buyers. It can be tracked by installing a traffic counter at the door. The technology costs about $800 (USD) (http://www.storetraffic.com/), and pays for itself in approximately three months. Many stores tell me that their traffic is really down. I ask, "How do you know that? Is it down 10 percent, 20 percent, 30 percent?" Without a traffic counter, they don't really know.
With these three measurements in place, we can then measure our performance against a standard (benchmark). For example, a well-performing store should be increasing AT, IPT and CR every week. The important thing is not so much where you are today, but the fact that you are improving these numbers every week. If these numbers are not increasing, it may be due to lax staff, too many or not enough staff, the wrong merchandise mix, high pricing, poor category management, lack of advertising, signage, or the store's layout or location. Pinpointing the exact cause is not easy, but a low AT or IPT often signals that we are not suggestion-selling our customers, while low CR is often caused by not approaching customers properly, or by an incorrect mix of merchandise (out-of-stock for best sellers, or no-stock for key desired items).
The best way to increase AT and IPT is through suggestion, or what I often call "education selling." This happens when a sales associate engages the customer and determines what their real need is. For every customer, the need will be different. If we are not there to help them then why are we there? If we are just there to be self-serve stores, then we really do not need anyone in the store except for a cashier, as in a grocery store. Benchmarking AT and IPT allows us to measure how well our staff is really educating and serving our customers. If my staff are truly engaged with a customer, and fully understanding of their needs, then my AT and IPT will increase. These two benchmarks are invaluable in reminding every sales associate how important it is to fully engage and educate customers so that we can share our knowledge with them and make their purchases even better.
Suggestion selling has to be practiced all the time and become part of the culture (DNA) of the store. I suggest that owners pick up an item (when customers are not around) and ask their staff, "Give me five! Five additional items you would suggest to a customer who likes this item." It is only when we constantly practice it that it becomes second nature to know right away what will help our customer. This is not easy: there are so many items in our stores, and so many that can enhance others. Our sales associates have to be constantly practicing and learning in order to make this a reality in our store. It does not come easily, and will not happen through wishful thinking. Establishing the benchmarks of AT and IPT will focus each sales associate on each individual customer. It is powerful. And do not forget that "what gets rewarded gets done." Once I start to measure these two benchmarks, I have to reward my staff when they improve them. The most powerful reward of all is praise. Every time I hear one of my sales associates practicing suggestion or education selling, I need to tell that associate, "I just heard you helping that customer. I want you to know that you really made a difference in their life—what you just suggested to them will not only improve their performance, but it could also save them from an injury. You did a great thing, thank you!" This praise, immediately following a sale, will not only make your associates feel better about themselves, but it will also increase the likelihood that they will do it with every customer. Contests are also motivating, but do group contests. Tell all your staff that if we can get the AT up by $2 this week, everyone will get a gift certificate to a local restaurant, or you will make a donation to their favorite charity, or you will wash their cars in the parking lot! It does not have to be a big prize, just something that says "great job." Don't forget having contests and praise for IPT and CR too!
SPSF is the next benchmark that we need to examine. The formula to calculate this number is our total selling area (this is our total store, excluding the stock room, office, receiving room, and behind the cash register) divided into our total annual sales. For example, if our store has 800 square feet of selling area and our annual sales are $140,000, then $140,000 divided by 800 equals $175 per square foot. We always calculate this over the time frame of a year. What it measures is how productive we are in the space that we have. If the SPSF figures are too low, it tells us that we most likely have too much space: we are paying rent on that excess, as well as often filling it up with inventory, which is also expensive. Benchmarks for SPSF are relatively universal for stores. Consider that Wal-Mart has SPSF numbers in excess of $300. The rule of thumb is that for an independent sporting goods store, if your SPSF are less than $200, you have a problem; if they are between $200 and $300, you are moderately productive; $300 to $500 is very good; over $500 is outstanding; and in excess of $800, you probably need to move to a bigger store!
IT is the next benchmark, and like SPSF it is calculated on an annual basis. The formula for calculating this is to divide total annual sales by average inventory at retail value. For example, if your year's sales are $140,000 and your average inventory at retail value was $85,000 (calculated by adding each month's beginning inventory at retail value and the last month's ending inventory at retail value, and dividing by 13), then your IT would be $140,000 divided by $85,000, which equals 1.65 stock turns. Just like SPSF, there are industry standards for this measure. If your stock turns are less than 3, you are not being productive; from 3 to 5 turns is good performance; and over 5 turns, you are really doing a great job. Inventory turnover affects so many parts of our business. When turnover is low, we also often have cash flow problems, old and obsolete inventory, and not enough of what is selling. When turnover is higher, we have better cash flow (since we can pay our bills from what is selling), we always have new items to show our customers, and we use less space in the store. The best way to improve IT is to buy less! Ask yourself before you write an order, "How long will it take me to sell this?" Remember it is easy to write 48 on a purchase order, but it is often difficult to find 48 customers in a month that want that specific item. Try to just buy what you can sell in sixty days (thirty is even better).
The last benchmark that we will discuss is SPE. This measure tells us how productive we are with our people on an annual basis. This benchmark is completely internal, as it can vary widely from store to store. The formula for calculating this is to divide total annual sales by the number of full-time equivalent employees (FTEs). (FTEs are calculated by taking the entire number of hours worked by everyone in the store for a year, and dividing that number by 2,080). For example, if my annual sales were $180,000, and the total number of hours that everyone in the company worked that year was 6,200, then the FTE would equal 6,200 divided by 2,080, or 2.98, which I would then divide into $180,000. This would give me $60,402 as my SPE. What is important is not the absolute number, but rather that it increase each year. It is not a good thing if I add employees while my SPE are declining. Eventually I will go out of business if the decline continues. Have your accountant calculate it for the past five years, and see what your trend is.
How Can It Help Me?
Benchmarking can make a substantial difference in the way you operate your store. The first three measures we discussed can significantly increase your customer satisfaction and sales, while the other three can improve your operating results. The combination of all six will make you a better retailer!
About the Author
Jim Dion is founder and president of Dionco Inc., Chicago (US). He is an internationally known consultant, keynote speaker, trainer, author, and one of North America's leading experts on retail technology, retail selling and service, merchandising, operations, and consumer trends.
Dion has taught at Laurier University, Ryerson University, and the International Academy of Fashion Merchandising and Design in Chicago. He also authored the retail selling manual Retail Selling Ain't Brain Surgery, It's Twice As Hard. In addition, he co-authored Start and Run a Retail Business for Self-Council Press. He can be reached at email@example.com.