Recalibrating Traditional Benchmarks of Success
By BRANDON SAMS | CONTRIBUTING WRITER
Why Developing Newer and More Relevant Metrics is Mission Critical for Retailers
It is time to reimagine success. As the retail industry has continued to metamorphosize over the decades, researchers have found the traditional ways to measure success don’t quite tell the full story.
In the age of digital disruption, benchmarks associated with the traditional image of success simply do not serve as accurate indicators of achievement. Some of the parameters often used to approximate company valuation include same-store sales, which defines the success of a single brick-and-mortar store as a telling of a business’ value, and sales per square foot, which divides sale numbers of a physical shop by its size to calculate efficiency.
It’s clear to see why these metrics are outmoded since much of the retail experience occurs fully online. So while a storefront may show low same-store sales or sales per square foot, those metrics do not illustrate the popularity of a shop or the demand in a specific area. At least, not entirely.
These metrics are still useful and paint an interesting picture especially for small business owners; however, the picture has become progressively incomplete. Most retail executives understand this. A report by Deloitte found 88 percent of CFOs and finance execs are actively rethinking traditional metrics. The retail business is largely cross-channel, according to executives, and that is why many stakeholders are keen to develop better ways to define the overall marketplace success of a business.
“The lines between channels have blurred beyond recognition,” said Matthew Shay, president and CEO of the National Retail Federation. “While retail continues to evolve and adapt to changing consumer preferences and new technologies, it is increasingly critical to develop newer, more relevant metrics…the current suite of metrics (was) built for a time that no longer exists,”
It is never enough to just say the benchmarks fall short, we need to provide alternative metrics to allow retailers to evaluate and refine their business practices in a generally methodological way. These metrics should encapsulate modernity while also ensuring the thematic interests of business owners. This includes profitability, return on investment and growth potential as well as a general brand inclusiveness including channel agnosticism.
Shay suggests a value-based metric that allows investors and stakeholders to more fully understand where to place their bets on traditional brick-and-mortar stores and startups since the scope of success diverges between the two. He argues the playing field should be leveled. Since both compete in the same markets, both should be evaluated by the same market benchmarks.
- Sales-per-unique-customer: This new metric replaces outdated ones like sales per square foot. Defining sales per unique visitor or customer helps bridge the gap between businesses that seek out new customers and those that seek to cater to lifelong consumers. How much are is each consumer spending? How does that relate to the marketing expenditures? This approximates the effectiveness of a business’ model to get consumers to spend their money and what type of procurements: large-scale, expensive items or more frequent, smaller purchases.
- Retail-profit-per-transaction: Traditionally, product margins are considered an important way to evaluate a business’ valuation and for good reason. However, subscription-based services have exploded on the market growing by 100 percent every year over the past five years, according to an industry report by McKinsey & Company. As much as 15 percent of online consumers utilize at least one subscription-based service and 46 percent are subscribed to a digital streaming service such as Netflix or Hulu. These examples do not have a product to evaluate success against. The monthly payment for the services is the product. Switching to profit per transaction allows an apt comparison between brands’ retail profitability across channels.
These are the new metrics, but the Deloitte report also mentions three traditional benchmarks, free-case flow, revenue growth and return on invested capital. These allow a more comprehensive understanding of interconnected revenue streams and the success of advertising, marketing, membership plans and other options. Much like the connective tissue that binds the digital space with the physical storefront, combining these traditional metrics with new modes of evaluation allow for a more accurate picture of contemporary success.
Metrics that work both independently and connectively to configure improved, strategic decision-making on behalf of revenue production. Of course, if success was that easy to predict then 66 percent of new businesses would not fail within 10 years of operation. The intricacies of cultivating profit-making business is as unpredictable as the weather. The power to assess the unstable, fluctuating tectonic plates upon which the industry lazily sits upon allows businesses on the verge of collapse to adapt to new industry standards and reconfigure their conception of success.
In an industry undergoing a massive paradigm shift, companies need additional analytical tools. Implementing and upholding a new outcome benchmark could lead the entire industry to be more efficient and accurate in the creation and capture of value, revenue and profit. An innovative, holistic measurement model can offer a reprieve to business leaders seeking a refuge from the corrosive haze of digital disruption.