Lesson 3: Measuring the Metrics that Matter 

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In the previous lesson we talked about 'building' scientific tests for our businesses. 

Here's a brief recap:

Lesson 2 addressed the process of turning a list of ideas into a prioritized, actionable list of initiatives. It also emphasized the need to apply scientific vigor when trialling new ideas. The two key concepts introduced are the ‘Minimum Viable Product’ and ‘Islands of Innovation.

In true lean fashion we are always looking to improve and refine the structure and content of the Lean Retail 101 emails, so please let us know what you think via hello@theleanretailer.com or on twitter or Facebook.


Lesson 3: Measuring the Metrics that Matter

What metrics should I be paying attention to? How do I know what success looks like?  

By now you should be set with a list of potential new ideas and some thoughts about how you can efficiently and effectively test them out.  The next step is to consider how you will measure and define the success of these tests.  

Lean methodology places a huge emphasis on taking a data-led approach to innovation. As entrepreneurs we naturally want our new initiatives to be successful, which can result in a built-in bias to our tests. Numbers provide an important objective framework against which to judge success and hold ourselves accountable.  

 There are two key steps in defining the data you will use you assess success.   

  1. Choosing the Right Yardstick
  2. Pre-defining Success

Choosing the Right Yardstick

 In every business there is such a thing as a vanity metric. In technology we use this term to distinguish a headline number that might make us feel and look good (e.g. monthly website visits), from one that provides us actionable intelligence that we can really use to help move our business forward.  Without a doubt the biggest danger metric in retail is gross revenue.  It’s so easy to sit back and see that number going up and assume that everything you are doing is correct. But a high revenue, low margin business is a very dangerous place to be - your costs are high and a small change in fortunes can really impact on your cash-flow. 

Even more importantly, if that number starts falling and we haven't been looking at the details, we are left not knowing what was making it rise in the first place.   

So what are the metrics we should be looking at?

Each and every test should be measured using the the most relevant possible metric(s). This could be sales figures, transaction volume, sales by hour, items by hour, sales by employee, foot traffic, positive yelp reviews, negative yelp reviews, email addresses collected or, frankly, a hundred other measurements.  The important thing is that the yardstick you choose be the best and most appropriate unit of measurement to assess the success of your new initiative.  

As a brief guide, here are a few useful metrics that all retailers should be tracking.   

1. Overall Sales by Hour

As store owners we can all make intuitive guesses about roughly when our businesses are most busy. However, having concrete numbers lets us make more informed and intelligent decisions about critical things like opening hours and staffing levels.

For example, if you are seeing dramatically higher sales towards the very end of your business day, it is worth experimenting with staying open longer. If you are seeing a huge lunchtime peak, it might be time to think about adding people during the rush. Getting these kinds of decisions correct is fundamental to your business. 

2. Item Sales by Hour 

We all know that coffee is a big seller in the morning. But what should you be asking your cashiers to cross-sell? Which treat should be prominently displayed next to the register? Muffins or Croissants? Cookies or Brownies? Donuts or...well, you get the point.  

Learning which items are selling at different times of day can help inform your inventory management, your promotional plans and even what time of day you turn the slush puppy machine on! 

3.  Sales by Employee

It’s crucial that you understand how your employees are performing so you can train and reward them as appropriate. This is particularly important if your business hires skilled or semi-skilled staff, such as at hair and nail salons. 

I think we’ve all seen how a skilled, knowledgeable and confident sales person can make a big difference in convincing customers to purchase more of your better margin products. Thus, identifying this employee isn’t just important in terms of rewarding his/her efforts and improving your bottom line, it’s a great opportunity to share ‘best practices’ with the rest of your team. 

4. Tracking your Margins

From behind the counter it’s all too easy to mistake a busy day for a great business day but just because something is selling like hotcakes doesn’t mean that it’s really growing your bottom line. 

If only we could all sell nothing but cosmetics or movie theater popcorn, we’d all sleep more soundly at night. Sadly, most retailers have to deal with a product line where the margins range down from the reasonable to the superslim. That’s why it’s really important to track your margins and ensure that you are doing what you can to increase sales of high-margin items.

5. Track Your Most Frequent/Important Customers

It is crucial to identify and reward the core group of repeat customers that are disproportionately contributing to your revenue. You can do this by collecting emails using a modern point of sale system. Loyalty cards are a simple way or rewarding this group. 

Not only should you track how much this group spends but also look at which products they buy. Understanding what your core target audience wants can really help you streamline your product offering. 

Pre-Defining Success

Imagine you are an independent clothing retailer selling high-end fashion.  You believe you can bring in a line of accessories that will really complement your clothing range. You are a savvy ‘lean retailer’ so you are planning on trialling a small number of accessories by offering them in your online store before committing to a larger order for your brick and mortar store.  So far, so awesome. You launch the sale and over a two week period you sell ten pairs of shoes, ten hats and five pairs of gloves.

Is that a good result? Should you now take the plunge and commit to a bigger order? The fact of the matter is, if you have't pre-defined success, you simply can't make that call. 

By declaring the number in advance you are setting a benchmark for success that needs to be hit. This benchmark shouldn’t be arbitrary but instead rooted in your business needs.  For example, the number of accessories you have to sell to call the trial a success should be rooted in the space they take up on your shop-floor, the employee time-costs associated with maintaining the space and selling the goods. Essentially, you have to ask yourself - is the juice worth the squeeze?  

Always declare your goal numbers in advance and clearly define the time period of the trial.  Whilst this process will never be 100% scientific, by declaring a clear numeric goals in advance you are holding yourself accountable.  If you haven’t predefined those numbers, it is frankly too easy to fudge the numbers, look back at the trial and declare victory retrospectively.  So before you start, physically find a piece of paper and write down what you're going to achieve. 


Homework

Some time in the next few days, step away from the counter, find a quiet corner and assign each of your new initiatives a metric you will you use to judge it and define the numbers you would need to hit for the trial to be declared a success.  


  


 

Choosing Metrics and Predefining Success

Idea Experiment Metric Goals
Upbeat music will increase sales. I'm going to bring in a stereo from home and play upbeat music on alternate days, comparing sales with off-days. Transaction volume, ticket size. 5% rise in transaction volume.
       
       
       

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