Retail Dogma

The Sales Equation

The sales equation for retail & ecommerce businesses is:

Sales = Traffic x Conversion x Average Transaction Value (ATV)

the sales equation
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Sales Equation Example

For a business that has received a foot traffic of 1354 customers and had a conversion rate of 30% and an average transaction value (ATV) or average order value (AOV) of 112$, the formula can be applied as below:

Sales = Traffic x conversion x ATV

Sales = 1354 x 0.3 x 112$ = 45,494$

The main application of the sales equation, however, is not to calculate sales, but rather to test how tweaking each component of the equation will affect sales.

If we took the same example above, and decided to test how increasing conversion from 30% to 32% will affect sales, we can apply the formula again:

Sales = Traffic x conversion x ATV

Sales = 1354 x 0.32 x 112$ = 48,527$

So increasing conversion by 2 points will increase sales from 45,494$ to 48,527$. That’s a 6.7% increase, just by working more on the conversion alone.

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Uses of The Sales Equation

The sales equation helps retail or ecommerce managers understand the reason behind the sales performance, and how to act on such performance.

So when the manager analyzes those 3 components of the sales equation and sees where the underperformance is coming from, he/she will then be able to fix the problem.

For example, if the business is underperforming and sales are below budget, this could be due to:

  1. Low Traffic
  2. Low Conversion
  3. Low Average Transaction Value

For example, if the conversion is at targeted value and ATV is also on target but the traffic is low, then the business may need more marketing efforts to drive traffic to the store.

If traffic is fine and conversion is fine but ATV is below target, the business needs to work on increasing order values through different sales tactics on the shop floor or by creating different sales offerings that drive higher transactions.

Read Also: How to Increase Average Transaction Value?

So the sales equation helps in understanding the current performance, and also helps in building and testing scenarios to see how tweaking certain KPIs can affect future performance in a quantified manner.

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More Resources

Thank you for reading this article on The Sales Equation. We recommend the below free resources as well:

Read more articles on Retail Sales Management or join the academy and learn how to manage the sales & operations process and deliver results through a retail team.

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