January 5, 2015 —
Generally speaking there are three types of home goods retail selling environments:
A) The “Live on the Traffic” Operation
B) The “Room Design” Operation
C) The “Hybrid” Operation
The “Live on the Traffic” operations typically are highly promotional and focused on closing the deal when the customer comes in the door the first time. Salespeople perform little prospecting on their own. They tend to sell from stock types of operators and offer various financing programs.
The “Room Design” operations are much less promotional. They build a following through spending a greater amount of time with each client. They don’t need the traffic counts that promotional retailers need because they generally produce a larger ticket size per customer. They tend to be special order, room planning and customer in-home focused operators.
The “Hybrid” operation, as the name implies, is a mix of these two. They have a blend of promotions to drive traffic and also offer some special order, but usually are limited on the actual in-home design services.
I have seen great successes, dismal failures and everything in between in all of these environments. So there is no right or wrong type of operation. The main thing is that you know who you are and how to improve. That’s what the sales equation will help you do. It sets the stage for improvement in your top line revenue in any selling environment. Here’s the equation:
Sales = Customer Opportunities (Traffic) x Close Rate x Average Sale
Whether you are a “Live on the Traffic” or a “Room Design” type of operation, determining the elements that make up your sales equation are a critical and a necessary part of improving it. If a promotional type operation has interactions with 2,000 customers in one month and closed 35 percent at $1,000 each on average that equals monthly sales volume of $700,000. At the other end of the spectrum, a home design operation might get the same sale results with a different mix. If they have 700 customer interactions with a 25 percent close rate and a $4,000 average ticket, they would also produce $700,000 in monthly sales volume.
The Value of Improving the Elements
I will use the first example to illustrate the impact of what a 10 percent increase in each of the elements in the equation would have on overall sales. So, customer interactions become 2,200, close rate becomes 38.5%, and average sale becomes $1,100. The result is sales of $931,700. That is a 33% increase in sales based on just a 10 percent increase in the elements.
The reason I am showing you this is to encourage you to take the first step, which is to become familiar with your sales equation. You should know these performance indicators for any given date range and definitely track it on a weekly, monthly, quarterly and annual basis for all stores, salespeople and categories.
To get the data, you will either need a software system or go through the tabulation manually in Excel. As long as your information is accurate, the resulting information will help you set a strategy to improve your top line.
Customer Opportunities (Traffic)
This can be the most challenging part. If you just ask your salespeople to report their selling opportunities to you, you will likely get mixed results. The best way that I have seen businesses get accurate traffic counts is through using a Customer Relationship Management (CRM) software system where salespeople record their customer counts. This data is compared to a visual proof traffic counting system. These two systems ensure a level of accuracy. In fact, several stores I have worked with are reporting 95 percent CRM opportunities recorded vs. traffic counts.
Traffic is one of the most important Key Performance Indicators (KPIs) in retail. I often say, “Knowing Traffic is Retail 101.” Along with being a vital part of the sales equation, it helps you judge the effectiveness of your advertising. If you executed a certain promotion, a measure of its results in bringing people to your store is seen in your selling opportunities during the promo period. Or, if you are an operation that is less promotional, the number of selling opportunities is an equally important indicator of how well the salespeople are doing in engaging their customer base.
Traffic is also an important factor in determining correct staffing levels. One of the top reasons a sales floor underperforms is not having the appropriate number of properly trained sales associates. Without traffic numbers, you may be guessing at your correct staffing level. With this, a store that lives on the traffic will need a much higher number of sales people per customer ratio than a highly design-oriented store. For example, I have seen high-traffic stores operate with 180 to 200 customers per salesperson per month and design operations operate successfully with 80 to 100. You’ll have to find the right ratio for your store.
Once you know your traffic, this part is fairly easy. Just take your number of sales and divide that by your selling opportunities. This will vary by the type of operation and category of merchandise, too. Categories such as mattresses or appliances, for example, should get a high close rate. Often, these are necessity purchases so closing on the first visit is important to success. I have seen verified annual close rates over 60 percent and as high as 80 percent in these categories.
Also, for operations that do not follow up with customers who are “just looking,” it is very important to focus on tracking and improving close rates as they are relying on making the sale on the first visit. Because once they’re gone, you won’t have any way to contact them.
Other operations that do more follow-up, design work and in-home visits, may have several face-to-face meetings with a customer until a sale is finally made. They may have a lower close rate overall because they are good with follow-up and actually engage their customers more often. Close rates in full-line furniture tend to be between 15 and 30 percent.
Finally, average sale is the total of all tickets per customer per day divided by the total volume. Whatever type of operation you run, high-end, low-end, special-order or stocking focus, average sale is a critical performance measure.
Know where you are overall in your business on a monthly and quarterly basis.
Set minimum performance standards for your sales teams to achieve overall and individually.
Constantly Implement Strategies to Improve
Whether you are a high-turn operation with an average sale of $1,000 or a room-planning operation with an average sale of $2,500, a $100 dollar improvement means exactly the same thing for each sale completed. When a business is above its break-even sales level, that extra $100 equates to typically 30 to 40 percent in extra profit. So it really matters and adds up. In the home furnishings industry, I have seen average sales range from as low as $500 to as high as $5,000.
Whatever type of operation you run, start by implementing processes to collect data so you know why your sales volume is what it is. From there you can set clear expectations for each metric to achieve your desired volume. Then you can develop a strategy for improvement. Continually tracking the sales equation will act as your report card. Keep improving your selling, marketing and customer follow-up processes. You will likely see improvements in traffic, close rate, average sale size and, of course, your overall volume of business.
David McMahon is a management consultant and certified management accountant. He is director of consulting and performance groups for PROFITsystems, a HighJump product. You can reach him to discuss improving your situation at firstname.lastname@example.org.