Retail math refers to a set of formulas used by retail businesses in their day-to-day operations to calculate certain retail KPIs and metrics that measure the performance of the business.
Importance for Managers & Owners
It is very important for managers and store owners at any retail business to understand and practice using the different retail math formulas on a regular basis, in order to be able to make the right decisions for the business.
There are different sets of formulas for each retail function, and professionals only need to familiarize themselves with the relevant retail math formulas related to their function.
For example, the sales and operations team at the retail business will be dealing with a different set of formulas than the buyers and merchandisers, and the same applies for the finance department.
For retail owners and entrepreneurs it important to be familiar with all the formulas, in order to be able to manage the whole business and assess the performance of your teams.
We have created a free retail math formulas cheat sheet , which you can download and use for reference.
Below we will list the most relevant KPIs for each department with links to detailed formulas and explanations.
Retail Math for Sales & Operations Department
The sales & operations team will be dealing with calculating and analyzing the following retail KPIs through daily sales reports:
- Average Transaction Value (ATV or AOV)
- Units per Transaction (UPT or IPC)
- Conversion Rate
- Sales per Square Foot (SPSF)
- LFL Growth (Comp Sales)
Using retail math for sales and operations, managers can find out reasons behind low sales performance and take corrective actions based on it.
For example, after analyzing the reports they might find that ATV is low, while the conversion rate is good. This would mean that a lot of customers are buying but they are picking low ticket items.
The manager can then brief the team to work on up-selling, cross selling and utilizing add-ons to increase the average order value for customers that are already coming to the stores and converting.
Using retail math here would allow the manager or business owner to focus his efforts on the right actions, instead of trying everything and overwhelming their teams.
Retail Math for Buyers & Merchandisers
Buyers and merchandisers will mainly be dealing with inventory management retail math formulas. These inventory metrics can also be generated from system reports on a regular basis:
- Inventory turnover
- Average Inventory
- Days Sales in Inventory (DSI)
- Sell Through Rate
- Gross Margin Return on Inventory (GMROI)
- Forward Stock Cover
- Open to Buy
Using retail math for buyers and merchandisers would help maximizing the return the business is getting from its inventory, by buying it right in the first place, pricing it right and then managing it efficiently to get the highest gross margins out of it.
This can only be done by calculating and analyzing the different metrics and acting on them.
For example, a buyer would be able to allocate the buying budget to better performing products or product categories after reviewing the GMROI of these categories. We explain this in detail in the GMROI lesson, so please go through it.
A merchandiser can regularly analyze the sell thru rates of the different SKUs and start actioning their markdowns early on, based on this information. So instead of giving discounts on everything in the store and losing margins on products that are already selling well at full price, the merchandiser can use retail math to target their markdowns for the low performing SKUs.
Retail Math for Finance Department
The finance department at the retail business will be dealing with retail financials formulas and comparing them to the industry’s benchmarks to gauge performance.
Some of these formulas are also inventory related, because inventory is the retail business’s biggest asset and directly affects its profitability.
- Gross Profit Margin
- Gross Margin Return on Investment
- Inventory Turnover
- P&L Metrics (EBIDTA and Net Profit Margin)
By analyzing the finance related KPIs the manager can understand where the business performance stands and why.
For example, the business might be generating loss at the end of the year. While analyzing the different metrics the finance department might find that the gross margin is too low for such product category. The same can be for inventory turnover, net profit margin or GMROI.
Read also our retail financials benchmarks page for reference by category.
This will lead to the advice for the other departments to reduce their markdowns, negotiate supplier prices, reduce their manpower budget or change their buying strategy.
The decisions are always made based on the results of the different metrics… and that’s why retail math is important for all retail managers.
Useful Free Retail Math Resources
- Retail Math Formulas Cheat Sheet
- Retail Financials Benchmarks
- Retail Price Calculator
- Retail Margin Calculator
- Retail KPIs Calculator
Retailer & Founder of Retail Dogma, Inc.
Rasha has 14 years of retail & ecommerce experience. She has started an ecommerce business in 2008, and later worked at H&M, Bath & Body Works, Victoria’s Secret and Landmark Group. She’s lived in 4 different countries, speaks 3 different languages and holds an MBA in Strategic Management & Marketing.
You can connect with her on Linkedin.