One percent. It doesn’t sound like much does it?
Written by Tony Loxton
Is Conversion Rate the be-all and end-all of retail metrics?
When it comes to key performance metrics in retail, most companies are primarily concerned with conversion rate. This metric takes the total number of sales and divides it by the number of people who’ve walked through your store – basically, the number of visitors who’ve “converted” to buyers. Here’s the formula:
It’s easy to understand why retailers focus on this metric as critical towards success. Retail is about sales at the end of the day, which is why you want to know how many of the visitors in your store are actually buying your products. The formula itself is also a simple one that anyone can understand.
However, it’s important to remember that conversion rates don’t give you the whole picture. For instance, conversion rates will vary depending on the industry. Someone who walks into a supermarket is very likely looking for simple household items or groceries that they use on a day- to-day basis, so the conversion rate will be high. If you work in a speciality sector, for example a suit store or a tile shop, your conversion rate will probably be lower since many of your visitors will simply be checking to see what their options are.
Let’s look at how conversion rate is applicable in real world terms. For example, you manage a shoe store that specialises in affordable sneakers in the $20-$30 price range. You decide to launch a promotion where shoppers who buy two pairs of shoes get 50% off the cheaper pair. Before the promotion you saw a conversion rate of 40%. After the promotion was launched that number rose to 65%. People saw your special offer and decided to come in to take advantage of it. Thanks to the conversion rate formula, you were able to easily calculate the impact of this promotion.
As a retailer, you want to grow your conversion rate as much as possible, since greater conversion rates mean greater sales, and greater sales mean greater profits. Right?
The example above highlights how although you may have increased your conversion rate, you might actually be making less money than before on each sale. This is more formally known as the Average Transaction Value (ATV). ATV, as I mentioned before, is the average amount that buyers spend on each sale. It is calculated using the following formula:
It’s a vital metric that you need to keep an eye on, and is connected to another critical metric that many retailers don’t take into account: shopper yield.
Shopper yield takes into account both the conversion rate and ATV to help you calculate how much each shopper spends on average. This is the formula used for calculating this metric:
Let’s take a look at our shoe store example again. In our store, we have a conversion rate of 45%. The ATV for each of these buyers is $50 when they buy two pairs of our affordable sneakers. We launched our promotion and saw the conversion rate rise to 65%. However, the ATV for each of these buyers is only $37.50 for customers since the majority of our customers are buying two pairs of our affordable sneakers.
Let’s calculate the shopper yield before and after the promotion. The shopper yield before the promotion works out at $22.50. The shopper yield after the promotion works out at $24.38. Thankfully, the promotion has yielded a positive result, however, this may not always be the case.
Imagine you’re hosting a massive sale at an electronics shop, with a number of loss leaders to draw customers into your store. You expect customers to make additional purchases while they are visiting, helping alleviate the hit your store will take on the loss leading items. Before the promotion your store had a conversion rate of 60%, with an ATV of $145. During the promotion your conversion rate increased to 95%, with an ATV of $89.50.
In this example, our conversion rate showed a very healthy improvement. Almost everyone who walked into the store purchased something. However, our ATV dropped massively from $145 to $89.50. This could have occurred because people were only coming in to purchase the loss leading items. As a result your shopper yield decreased from $87 before the promotion, to $85.02 after the promotion. This is a very clear example of how conversion rate doesn’t always tell the whole story, and how shopper yield can be a much more accurate indicator of the actual cash flow of your store.
Another instance where shopper yield becomes extremely useful is as a comparative tool. If you have multiple stores, you can compare the ATV values of your stores to see how effectively each store is performing. When stores have a high or growing ATV, you can identify why they are experiencing improved performance. Once you have identified the cause of this increase, you can apply it to other stores. For example, specific promotions, particular products, or even something as simple as a slightly different approach to customer service can all have an impact on your shopper yield.
It’s important to understand all the different metrics that can have an impact on your store. This is why you should also consider an advanced foot traffic solution like Blix. Blix delivers ROI-focused metrics and reports so that you can better understand customer behaviour, sales and marketing effectiveness, and store operations. To find out more about Blix, take a look at our website or contact us today.
One percent. It doesn’t sound like much does it?