Furniture World Magazine
Volume 150 NO. 4 July/August
By David McMahon on 8/4/2020
The new front door was not invented during the pandemic; however, it has become critically important for furniture retailers over the past few months.
COVID or not, it is well known that the customer’s purchasing journey most often starts before going into a physical location. In the May/June issue of Furniture World (www.furninfo.com/Authors/David_McMahon/6) we characterized this as the “New Front Door.”
Because consumers are spending much more time in their homes, many home furnishings retailers have seen increases in lead traffic. It comes from multiple sources, including email, telephone, social media, as well as text, chat, video, website triggers and in-store traffic. Some businesses have become hard pressed to handle this increase due to compromised human resources and outdated processes. It is also true that even before the crisis, furniture retailers were mostly not up to the task of handling even a smaller amount of non-physical customer engagements properly. This retail condition is not anyone’s fault. It is a classic case of retailers doing things the same way as always because those things “kinda” worked.
Better management of all lead traffic is a sizable opportunity in retail. In this article I will discuss the customer journey, challenges retailers face, and explore ways to better manage the process so that Furniture World readers can achieve higher sales volumes and more satisfied customers.
The challenge starts with the fact that retailers use a variety of marketing methods to attract customers. These methods include traditional ads—for example, TV, print, Facebook and Instagram—plus search ads, email marketing, and a variety of website plug-ins. Then, when customers like what they see, or are just “in-the-market,” they will either transact online or attempt to reach out to retailers using the methods that they are most comfortable with. These include phone calls, emails and text chats.
That all sounds great in theory, but there are common difficulties.
Retailers that rely to a large degree on their brick and mortar business generally do not have business models and processes in place to handle non-physical customer leads. Their processes are entirely built upon salespeople “taking an up” once shoppers enter the building. Inquiries received via retailers’ “new front door” are not counted as “real” leads and are even seen as an interruption by some.
Even though leads received through this “new front door” signal the start of a customer’s journey, and her engagement with a retailer’s marketing, these engagements are often mismanaged. Here is an example of a typical interaction:
- A prospect calls the retailer.
- The prospect hears an auto message asking them to press a number, or any staff member who is free at that moment answers the call.
- If the first person who talks to the customer is not in “the sales department” he or she places the customer on hold while a salesperson is paged, or they try to muddle their way though the call.
- Once a salesperson is located, the prospect asks a question and then receives a short answer from the salesperson. There is little attempt to understand the customer’s situation. If the retail store is busy, the salesperson cannot take the necessary time to even record the prospect’s name, contact method or where they live.
- Call ended. The lead is not recorded. There is no possibility of follow up. The store does not find out what happened to the prospect— if they visited the store or if they made a purchase.
The same issues also occur with email inquiries, chat, and text. The main difference is that with written communications, stores often respond with poor spelling and bad grammar. Across the board there is a lack of attention, qualifying, tracking and follow up.
If you agree that there is an opportunity to improve the way you handle these kinds of customer inquiries, look at your processes and people. The first question to ask is “Exactly what is it worth overall for your organization to improve your lead management process?”
Terms like digital salesperson, internet salesperson and phone operator understate the importance of the function and what retailers are trying to accomplish.
Running through the numbers for a store we will call XYZ Furniture, let’s assume:
- The typical close rate for XYZ Furniture’s physical store is 30 percent. (This usually varies between 15-40 percent).
- The typical average sale for XYZ Furniture’s physical store is $1,800. (This can range between $500 and$5,000).
Using the formula…
Monthly Leads x Close Rate Increase x Average Sale Increase x 12 months = Annual Sales Opportunity
… we see that 100 extra leads in the store is worth $54,000 per month or $648,000 per year in extra sales (100 leads x .3 close rate x $1,800 x 12 months).
However, if I stated that this was the limit of the opportunity of improved customer journey management, I would be wrong. That’s because better lead management also produces higher close rates and higher average sales. This has been proven over the past few months by the many stores that operated via appointment during and after physical shutdowns. Close rates from well-managed non-physical leads range from 60-100 percent with average sale increases of hundreds of dollars. Extrapolating on the opportunity of 100 leads per month using these assumptions, the revised calculations for sales growth using the formula above can be calculated as follows:
One hundred extra leads in the store at a 70 percent close rate and $2,000 average sale equals $140,000 in sales per month or $1,680,000 per year in additional business.
Making it Happen
Any innovation starts with a new way of thinking. The process of organizational change needs to be accepted. Here are some new ways of thinking that can help you manage your customer journey to capitalize on incoming leads.
- Change terminology.Terms like digital salesperson, internet salesperson and phone operator understate the importance of the function and what retailers are trying to accomplish. My suggestion is to reclassify them under the banner of Customer Journey Management or Customer Lead Management. I have witnessed showroom salespeople who believe that internet sales are in direct competition to their retail in-store sales. The reality is that journey management done right supports revenue for the entire organization.
- Put one person in charge.Give them a title. The title might be Director of Customer Journey, Prospect Manager or Head Lead Manager. If many people are responsible for handling incoming (non-physical) leads, the reality is that no one will ultimately be responsible, therefore, fielding those leads will be less systematic and less effective.
- Define your systems and processes.The best retail operations have defined selling systems already in place for handling in-store traffic. Processes should be developed and put in place for nonphysical leads as well. Systems define outcomes so, when defining your lead management systems, consider the best outcomes for nonphysical leads. To me, that means converting a high proportion of incoming leads into sales of larger average tickets, while at the same time delivering top customer experiences. If you are on board with this, you will want one of the following four outcomes for an incoming lead:
From this data, you will be able to see metrics such as traffic by lead type, revenue per lead, sales by appointment type, success rate of lead managers and sales associates.
• An immediate sale• An in-store appointment scheduled with an associate• An appointment scheduled virtually• An appointment scheduled in the customer’s homeYour systems and processes define your sales funnel, much like natural gas being directed to homes. Upon entering the funnel your leads need to be managed in a defined way. When they exit the funnel they should move in a desired, organized direction. This results in less waste. “The gas does not spill.” Instead, the flow is controlled and moved along. Here is a summary of how the lead process may work:• Lead (calls, chats, emails, texts, messages, web forms) enter the funnel.• Customer inquiries are answered by the leads manager and/or dedicated staff that reports to the lead manager. If for some reason the lead management staff is not available, information can be taken for a same-day response. Lead managers and lead associates should be as knowledgeable about your products and selling systems as any other salesperson in your organization. Designated salespeople who normally handle walk-in traffic can also take these incoming leads provided they are trained and monitored and follow processes as directed by the lead manager.• Customer leads need to be managed in a uniform way, similar to the following five common in-person retail selling systems steps.i) Start a conversation. Start with an approved greeting. Get all their information including name, where they live and contact information for follow up.ii) Understand the situation. Ask the right questions and collect all the information necessary (pictures and video are great).iii) Propose a solution. Solutions include an immediate purchase, a scheduled in-store appointment during the week, a scheduled virtual appointment or a scheduled appointment in the customer’s home. Note that in-store appointments should be transitioned from the lead manager to a sales associate or a designer of the sales manager’s choosing. All appointments should be hard-scheduled with an accepted calendar invite!iv) Conclude the sale. Get the right merchandise and services booked for the customer.v) Follow up. Follow up with the customer during the entire process at scheduled touch points.
- Be ready for in-store or virtual appointments.Appointments are similar in many ways to making house calls in that sales or design associate preparation is critical. Ensure that they are prepared by having an understanding of the customer’s situation before the appointment. Have pictures, know how the room will be used and by whom (pets, children, number of people), ask about style/color preferences, when the merchandise is desired (custom and in stock), know budget and preference for financing (so approvals can be processed), even create sample room plans in advance. Treat in-store appointments as a VIP experience: think welcome package. Be Ready for Success!
- Track the lead process.Either use your ERP or a CRM as the hub of your process. This will enable task management and a central place to store notes. Control the pipeline of multiple leads through this “funneling” process. You can use various methods and platforms to communicate with prospects, but the interactions and tracking are best recorded in a central hub-like system. For example, if a chat comes in, it is recorded in the CRM or ERP hub. The appointment and follow-up are also recorded in the hub along with additional important information. Whether subsequent follow up happens via Facetime, in person, email, etc., all notes need to be maintained. This is a common work-in-process system. On its most basic level, the management system should track: To Do Tasks, Doing Tasks, and Done Tasks. By following this process, the management and tracking of information become an engine for growth.To generate a greater number of appointments and make your process as streamlined as possible, I recommend using a web based appointment system connected to your website and other sites (e.g., Instagram). This enables customers to book appointments with the desired sales associate at a time that suits all parties. Your manager can set the parameters of the available slots for sales designer associates. These systems help organize and make better use of everyone’s time.
- Metrics.Establish metrics for tracking the results of your lead management actions so you can achieve continuous improvement. Here are some metrics to consider tracking:a) Non-physical leads and sourceb) Who the lead was assigned toc) Leads with customer information vs. no informationd) Leads that result in a remote sale, an in-store appointment, a virtual appointment, no sale or a house calle) Sales associate assigned to lead via appointmentf) Results of appointments From this data you will be able to see metrics such as traffic by lead type, revenue per lead, sales by appointment type, success rate of lead managers and sales associates. You will also get an overall opinion of the value of managing your customer’s journey—starting with the real front door.
Upon entering the funnel your leads need to be managed in a defined way. When they exit the funnel they should move in a desired, organized direction. This results in less waste.
With any new process there are always people who say “What if this happens?” or “That won’t work because of…” I say, there are exceptions to everything. Don’t create your standard operating processes around exceptions. Don’t hurt your future by holding on to the past. Move toward where you want to go. You will have a much better chance of getting there.
It is a fact that customers engage with businesses prior to showing up physically. This was true before COVID, it has been greatly expanded by COVID and it will continue to be the norm after COVID. My advice is to constantly improve upon systems and processes for managing your customer’s journey and ask the question: “How am I going to better manage leads though my pipeline and into my funnel?” For my part, I will continue to develop systems and processes for our industry and report my findings and suggestions in follow-up articles for Furniture World to help you maximize your potential and your customers’ experience.
In recent months our customers have spent more time at home than ever before. This has caused a demand spike for merchandise and services related to working at home. Grocery, home entertainment, home fitness, hardware, comfort clothing, building supplies, home spas, electronics, appliances, and home furnishings have benefited.
Thus far into this crisis, home furnishings retail has been a recipient of a diversion of consumer disposable income. How long this will last is uncertain. In my opinion, spending on furnishings is fragile. Unlike the home entertainment industry (video streaming, gaming), there is little that our industry has done to stimulate long-term demand. Likely, our consumers will continue to spend more on their homes until either their lives return to a more normal pre-pandemic lifestyle or their spending power diminishes. If demand falls off, some regions will be affected more than others, as happened in the recession that began in 2008. At that point, businesses that weather current challenges well will likely continue to prosper—similar to the most recent recovery period we experienced from 2010 until 2019.
Demand Vs. Supply
Shifts in demand are fairly common, the result of wars, natural disasters, man-made environmental problems, terrorism, and other unfortunate circumstances. These can cause the demand curve to move “to the right,” or increase, in some industries and “to the left” or decrease, in others. Generally, a sudden event causes more (or fewer) consumers to be in the market for certain goods. Following April 2020 we’ve seen the home furnishings demand curve move to the right, while the airline travel demand curve moved to the left. With these sudden shifts, shortages and excess supply occur. I believe that the demand curve for furniture is more price inelastic right now. That means that consumer buying behaviors are influenced less by price and more by availability. As home furnishings product shortages have occurred, more consumers have been willing to pay more for home goods.
The two biggest challenges facing retailers right now are product and people shortages.
Product shortages have resulted from factory shutdowns, unavailable factory workers and supply chain disruptions.
Prior to the pandemic, when unemployment was at historic lows, finding and developing quality people was a top challenge. This situation has gone from bad to worse as fear of COVID-19 infection, increased unemployment benefits, low retail wages, and the perceived undesirability taking some retail furniture store jobs have made workers scarce.
Doing More With Less
Let’s examine a number of practices that can help you to weather the storm by doing more with less.
- Buy deep vs broad.With a smoothly flowing supply chain, a just-in-time, inventory replenishment strategy works well. You could buy “broadly” across all your merchandise categories and replenishing only when needed. However, with the erratic supply, all bets are off. The best bet may be to buy “deeper” across your very best SKUs. If you follow this strategy, ensure you have proven data on which items your customers want now. This strategy could backfire on you if you invest in untested product.
- Err on the side of over-inventory.Greater lead times equate to higher inventory levels. If your cash situation and warehouse capacity are such that you can carry a greater inventory percent to your sales volume than normal—you should do so provided you are buying the right merchandise. Do not make the mistake of over-investing in new product.
Consumer buying behaviors are influenced less right now by price and more by availability.
- Separate product into these two categories.Customers and salespeople will benefit from knowing what items are available today—either floor samples or product in your warehouse (the “available now” category). Customers who want something customized, or a fresh item (the “factory order” category) may choose a factory order subject to available production lead times. Ensure that after your greeting, you understand your customers’ reasonable timeline.For customers who choose to order new from the factory, be clear about lead times. Avoid giving delivery date ranges. To under promise and over deliver (UPOD) is generally a better practice. Instead of saying, “It’s going to be eight-ten weeks,” say, “Due to the current situation, to manufacture these new items for you, completion is maybe greater than two months.” You may also want to add a third product segment, “on-order” available to reserve.
- Continue selling after the sale.The sale begins when you write up a ticket, but that should not be the end. Whether you made an available-now sale or a new factory order, follow-up multiple times and re-sell. (Three proactive follow-ups at the minimum). To save everyone’s time, call your customers before they call you.
- Rethink markdown pricing.If you have a limited amount of inventory available to take home now, consider selling “drop” items (undamaged and visually like-new) at regular margins. Place a “take me home today” price tag on these items. Price, especially in an environment of product scarcity, is not the biggest factor with respect to consumer purchasing decisions.
- Seek balance in your vendor relationships.When the pandemic hit, some vendors were able to react fast, recalibrate their operations and ramp up production. Many have been struggling to react to the change in demand while keeping their workers safe. Everyone has been disrupted. It is more important than ever to focus on building quality relationships while at the same time cultivating new sources of supply. Unless you have a branded store, relying too heavily on one vendor may be risky. Not being important enough to any one vendor is also risky. Seek balance. Some domestic and regional vendors have been reliable in this current environment.
- Focus on appointment selling.Appointments between salespeople and customers allow for better use of the ultimate scarce resource— time. Whether an appointment is at a customer’s home or, better yet, in the store, both customer and salesperson should focus on accomplishing a result within a defined period, for example, one hour. Done right, appointments take fewer people and less time to produce a given sales volume. A number of stores have made the decision not to reopen their retail floors in pre-pandemic fashion. Instead, they’ve decided to continue to operate by appointment only.
- Guide your in-store traffic more efficiently.For those of you who believe that conducting business by appointment only is too radical a step for a brick and mortar furniture retailer, work to better control floor traffic. Continuous improvement in this area should be the goal of every showroom sales manager. To increase sales with fewer salesperson resources, managers must match customers to salespeople who are currently focused on other conversations. They must walk the fine line of moving salespeople between customers without causing frustration. Use technology to assist. Radios or app-enabled Bluetooth communication is necessary in most cases. Consider employing greeters (as opposed to CSRs) to direct customers to appropriate areas of the showroom if you often find yourself in open floor situations.
- Use price tags to tell a story.Price tags are not only about the price. They inform customers and remind salespeople about product and service options. Consider creating tags that show availability, additional product options, financing and services such as protection and delivery. With current technology it is simple to place a QR code on tags that link to product information, additional options and video. QR codes can even prompt a salesperson to come for assistance. This is already a reality in other industries, why not furniture?
- Direct virtual traffic more effectively.In the “New Front Door” article (July/August Furniture World), I explained how to capitalize on customer lead traffic. Doing this well helps you accomplish more with fewer people resources. Your objective should always be to make a meaningful connection with a prospect, then schedule a date and time to meet in-store. This way, your homework can be done in advance of a physical meeting, leading to a higher close rate, higher average sale and a happier customer.
- Leverage resources for follow-up.To do more with less, think about using automated emails, sending personalized text messages, and hiring staff whose sole purpose is to touch base with customers.
- Overstaff delivery and pay them well.In-home furniture delivery is a tough job. Arguably, compared to a UPS delivery person, furniture delivery is more physically and mentally demanding. Both compensation and staffing levels should be high enough to ensure that this vital function is performed well. Back-end DC positions are directly related to the speed of revenue in retail organizations.
- Practice LEAN internal merchandise flow.LEAN practices are now more important than ever. The nature of LEAN is to do more with less by constantly improving processes. Observe the ways in which you currently conduct activities such as receiving and delivery. Figure out what slows you down, then devise and document improved processes. If you can increase the throughput of merchandise via leaner activities, you make better use of your peoples’ time.
- Leverage technology for service issues.Reverse logistics, also known as “customer service problems after the sale,” can be time consuming and disruptive. A major strategy to do more with less is to control the work, rather than being controlled by the work. For example, using customer service technologies to make it easy for customers to enter their own warranty or protection claims on your website can enable a quicker and more productive response.
- Grow these two important close rates.Close rates from virtual leads and from in-store traffic are calculated as follows. They are indicators of your success at doing more with less.• Virtual lead to in-store appointment close rate = # of virtual leads / in-store appointments produced.• In-store close rate = # of visual traffic captured with door counter / # of sales.
- Review options for outsourcing roles.Here is a list of some of the roles in a typical home furnishings operation that can be outsourced: traditional marketing, digital marketing, content development, CFO / financial operations / accounting, HR, payroll, customer service, warehouse / delivery and repair. Outsourced partners should be specialists and be able to adapt to your business model. As with employees, an outsourcing partner can be successful or unsuccessful depending on their level of commitment, skill, personality, and desire to do the work properly.
From the time that this crazy ride started, many of us are just hanging on. It is complicated. It is exhausting. Take a moment, slow it down, look at your business, and consider how you can do more with less. Be honest with your situation and be open to trying new practices that give your employees and customers what they want. If you try, you might just get what you need. Enjoy your ride through this storm; surf well, so that when you break on through to the other side, you are ahead of your competitors.
Furniture World Magazine
Volume 150 NO 3 May/June
By David McMahon on 6/6/2020
The source and the management of every door to your operation, both virtual and physical, are critical elements for retail business success going forward.
The transition to the new front door is complete. From here on, brick and mortar have become a component of retail in some business models, but it cannot be THE definition of retail. The new “front door” for retail home furnishings business has become the place where shoppers first engage.
Over the past three months, retailers all over North America, have observed a huge shift in consumer behavior. This two-part article will discuss this shift and make suggestions regarding how Furniture World readers can and should adapt their business models.
Retail Never Shut Down
Retail sales never shut down over the past few months even though the buildings operated by “non-essential” businesses such as furniture stores closed.
Many brick and mortar retailers reading this may find it hard to believe that shuttered furniture stores generated significant sales volume during this period. In fact, some omni-channel ready retailers that previously generated a majority of sales based on walk-in traffic managed to generate sales volumes approaching normal levels. This was only possible for operations that were already functioning effectively before COVID-19. These retailers had the ability to ratchet up the digital aspects of their business to adapt and compete with e-commerce retail giants like Wayfair, whose sales exploded during this period.
By contrast, I believe that too many furniture and bedding retailers made the worst possible decision in recent months by posting “we are closed” messages on their websites and putting similar communications on their automated email replies and telephone recordings.
The Biggest Mistake
Retail should NEVER be closed, provided that there remains some capacity for communicating with customers and vendors, ordering product and delivering goods. Businesses that decided to shut down their entire lead funnel, saw sales go to zero.
Business operations are machines that run best while warm. Even those that kept operations going with minimal delivery, sales and service are getting back up to speed with greater efficiency. We can all learn from those who managed to stay running during the darkest time of the pandemic. Those retailers that went “dark” are having more trouble restarting.
- Customers still wanted to connect with retailers during dark times.The challenges people experienced while sheltering in place, including homeschooling and working from home, created new needs for home furnishings. That’s a big reason why customers continued to reach out to retailers who communicated that they remained ready and able to help people improve their home environments.
- Retailers benefited by aligning with the right suppliers.Throughout this period vendors and retailers faced similar challenges. Both were forced to change business processes overnight and supply chains were disrupted. Retailers who anticipated this issue, and expanded their inventory of bestsellers, were and are better positioned to adapt to supply chain shortages. Likewise, retailers that aligned with fewer, more reliable vendors are now better able to return to profitability. Good vendor relationships have proven to enable the extension of credit during times of physical retail closure. When reconsidering suppliers to adapt to your current situation you may want to refer to a previous article in this series, “How to Choose the Right Supplier” from the January/February 2019 issue of furniture World found at www.furninfo.com/Authors/David_McMahon/6
- Keeping key employees was a smart idea.Businesses that maintained their key managers and top performing sales and operations staff without a lay-off mostly managed to deliver and sell through this period. For a variety of reasons, at the time of this writing, many retailers are also in need of additional talent. Those that were not forced to furlough have fewer issues in talent acquisition. Some have chosen to give their people a bonus using forgivable PPP loan funds they have received.
- Doing the right thing was the right thing to do.During the current health crisis, many furniture retailers have extended support to front-line healthcare workers, leading to a heightened sense of community. Furniture and mattress businesses have donated product, time, even health supplies and equipment. They’ve also given gift cards to other local retailers hard hit by the pandemic. This created local goodwill for retailers who stayed engaged and involved locally, positioning them for a quicker rebound.
- Business process improvements made during the pandemic will yield big results.The pandemic accelerated the need for modifications to selling engagement systems, checkout processes, delivery, pick-up and service procedures. As well, owners and managers who kept their retail messaging current, plus accomplished tasks such as repricing, merchandising, training, and general organization, will be glad that they did.
- Retailers realized the benefits of peer support.Peer support has been critical to helping many companies navigate these challenging times. Our performance groups, for example, have met virtually, weekly, since the crisis emerged. The sharing of information about what has been working and how to deal with common challenges has drawn members closer together and, I believe, rescued several businesses.
- Appointment selling has become a powerful tool.“Appointment Selling” is the silver lining in this whole miserable experience. It is the one big competitive advantage that has emerged giving retailers with physical showrooms an advantage over the likes of Wayfair and Amazon. Retailers with both a physical and digital presence can let customers “test drive it before they buy it.” Sure, online-only retailers can provide 3D imaging and the ability to digitally insert items into photos of customer rooms, but that’s not the same experience. Appointment selling saves everyone time by matching a motivated buyer with a skilled salesperson or designer. Done well it helps shoppers make their purchase today — and remain satisfied tomorrow.Home living and sleep products are an essential product/service, especially in today’s stay-at-home economy, which is unlikely to return to pre-pandemic ways of living, business and travel any time soon. Appointment selling has allowed many retailers to safely do business with serious customers who need the essential service that home retail enables. Motivated buyers interacting with professional sellers of home goods have caused close rates to increase to between 60 and 100 percent. Along with this increase, average sales have grown, probably due a greater focus on helping consumers solve their needs in fewer visits.I see this trend continuing and I believe it should be tracked and marketed accordingly.
- Increased reliance on social networking.Facebook has become more powerful as retailers continue to rely on its unmatched social platform. Those retailers that cultivated an established following prior to the crisis have been able to successfully introduce appointments, auctions, and videos to generate business.
- Digital marketing has taken over.Digital marketing has taken over from traditional media as the dominant consumer-facing media in retail. Over the years, I have joked with retailers that if they ever wanted to know which media really works, they could shut everything off except for one media type and see what happens. During this crisis, this is exactly what many operations did. They shut down all but select digital media. The result for many was that the returns on ad spend went up considerably. In some markets, however, for retailers with a history of broadcasting niche-style messages over traditional media, increased impact was achieved among people who were stuck at home in front of the TV.
- Lead management should be tracked from the source.Portals such as Podium, Perq, Chat, and the good-ole telephone are now being described as “the new front door.” This is where the journey or first connection between customers and retailers occurs. This first contact is where retailers should register their “up.” Prior to the crisis, and even now, “traffic” meant shoppers entering through a physical doorway. Retailers are pretty good at measuring physical door (last door) swings, The “first door” most actually enter through (website engagement, chat, telephone) has been haphazardly monitored by most. The revelation here about the “new front door” is that the source and management of all doors, virtual and physical, has become a critical element for businesses going forward. Furnishings retailers must, therefore, develop systems processes for shoppers who enter through any door by using “Customer Journey Management.” This is the term I use for walking the customer through the various stages of a purchasing system. For retail home furnishings, this encompasses more than CRM (customer relationship management) due to the unique characteristics of buying and delivering home furnishings.
The next article in this series will explore the connections between “Customer Journey Management,” “Appointment Selling” and “The New Front Door” to look at how you can take advantage of a paradigm shift that has occurred in retail. Until then, remember that an omnichannel retailer, a truly essential retailer, is never closed. Don’t go dark, ever.
The below article is based on a study I did a couple of years ago. It is mostly valid today.
By David McMahon
Improvement starts with awareness and desire. The awareness of how you are performing against standards allows you to understand your strengths and weaknesses. It is through the measurement against these standards, or metrics, that you can find your gaps. Knowing your gaps and then having the desire to create a strategy and act upon an improvement plan is what separates average and top business managers.
For the good of the industry and to assist home furnishing retailers in improving their individual operations, we are publishing the financial portion of our performance observations during 2017.
During the course of 2017, I reviewed a wide-range of operations through our consulting and performance groups activities. In doing so, I established a set of metrics that I consider to be an excellent source for use in benchmarking against average and high-performers.
Below I am releasing the Profit and Loss (P&L) percentages observed. Following this I’ll give my interpretation. These numbers are broken down by what is the commonly accepted P&L format amongst industry retailers. The observations are expressed in 3 columns. The first 2 columns produce P&L’s averages. The 3rd column is used to show the top percentages in select metrics. These are the 3 column groupings:
- Average performers
- Average of Double Digit Profit Club (Net-income before tax) performers
- Average of Top-tier performer for each metric (Top 10%er suggestion)
The observations are expressed in terms of percentages of
total retail sales volume. This allows
for operations of different sizes to compare themselves using a “common-size”
format. For the purposes of
compatibility as well, we excluded electronics and appliances merchandise from
Financial Metric Observations:
Financial Metric Interpretation:
Here are my comments on the above numbers:
- Separating the percent of warranty and protection sales with respect to merchandise sales is now the accepted way of producing an industry P&L. This is due to the massive importance of increasing the proportion of warranty sales. They are typically the highest gross margin product that a retailer sells.
- The range of average and double-digit operations in % of warranty sales to total sales 3.73 % and 3.43 %.
- Top-tier operations in warranty sales almost double these averages. Their customers spend 6% of their dollars on warranty and product protection.
- Cost of Sales
- This is a prime area where the double-digit profit club outpaces average performers.
- With respect to cost of merchandise, double-digit profit operations had a 3% lower cost of goods % than an average operation.
- The top-tier performers actually even had almost another 3% cost advantage over the double-digit profit operations at 47%.
- A similar pattern occurred with cost of warranties. Better operations are trained and follow systems to sell on value rather than sell on price in my opinion.
- Gross Margin (GM)
- Gross margin percent of sales is just the inverse of cost of goods. So, the operations with the lower cost have the highest margin.
- This data supports the prior 2 years of formal studies we conducted with the HFA (Home Furnishings Association). Average performers show a 48.18% GM. The double-digit club gets almost 51% GM. While top-tier performers achieve 55%.
- These numbers are real! And, wherever you are with GM, believe that you can improve. I’ve personally helped move this number with clients many times by over 10% while simultaneously growing sales volume.
- Gross Realized Margin
- The generally accepted way of producing an industry P&L is by showing a second gross margin line called Gross Realized Margin. This first lists the reduction of costs by vendor rebates and discounts incurred. Then, it increases cost of sales by finance and credit card fees.
- It gives an alternate gross margin number as non-employee direct costs with purchasing the merchandise and making the sale are considered.
- There is a similar step-up in GM % with the 3 groups observed. So before any operating costs are considered, an average operation has 45.91% of sales dollars left to produce a profit. The double-digit profit club has almost a 3% lead already in the race for net-income.
- Administrative Costs
- Admin costs include general overhead expenses such as: Office and owner payroll, training, legal, accounting, travel, meals and entertainment, markets, software, and all other items that do not fall under occupancy, advertising, selling, distribution, and service.
- We find that on average operations spend around 12% of these sales volume on administration of their business.
- We see a ride range with this metric. It often is effected by the number of locations, the number of family members in the business, and of course with how lean an operator runs. The top-tier in this metric came to a very low 7%. In fact this may even be a bit too low for some. I feel that if an operation is under 10% here and can manage their work properly they are doing exceptionally well.
- Some operations here, in fact do not want to be too low as they feel they cannot provide properly for their employees. Certain owners feel that it is important have a proper amount of spend in admin areas such as health care, training, and technology to remain relevant to in the marketplace.
- Occupancy Costs
- These include all brick and mortar showroom facility costs such as rent, loan expenses, real estate charges, maintenance, and utilities.
- This is typically one of the most fixed costs a brick and mortar retailer incurs. It does not change that much from month to month. Whether sales go up or down, the rent, maintenance and utilities are pretty similar dollar-wise. However, as a percentage, as sales grow these cost fall and result in a positive impact to the bottom-line net income. This is one of the reasons why high performing sales floors produce so much more profit than average performers.
- Average occupancy is 8.15% of sales. The double-digit profit club is 7.64% and the select top-tier performers in this metric are as low as 4%.
- Advertising Expense
- An average operation runs 5-6% of sales. Depending on the location however a profitable business is possible up to even 10%. I’ve seen higher of course, but not too many that actually made much money above that.
- Oftentimes, it is good to consider occupancy and advertising expenses together percentage-wise. Whatever your mix, it is highly advisable to keep the combined percentage under 15% of sales.
- Selling Expenses
- Selling expenses cover sales managers and sales people’s wages, bonuses, commissions and other payroll costs. Sales training, outside design contactors, point-of-sale material may all be included here as well.
- I commonly see operations in the 5% – 10% range. This data is consistent. Average stores are at 9.21%, the double-digit club is at 7.84% while the top-tier in this metric is at 5%.
- This cost should be mostly a variable cost. That means that when sales go up or down selling costs should go up or down as a dollar amount and remain constant as a percentage. I do not mind if this cost is on the high side for any one client as long as their GM % is also on the high side.
- This is actually a net percentage. It represents all customer service costs that are related to solving issues with damaged and defective merchandise. It includes any dedicated employees and the costs of repair. Costs are reduced by any income or amounts in credit that are received back as compensation from vendors.
- A highly functional operation has very low service costs as a net percentage.
- Delivery Income
- This P&L breaks out delivery income as a separate line item from warehouse and delivery activities. It should be the goal of an operations to collect an appropriate amount that covers the direct delivery related expenses. Otherwise, delivery costs come straight out of gross margin dollars.
- On average operations seem to collect around 1.9% of sales in delivery income. However, the top-tier performers in this metric collect double that.
- Warehouse and Delivery Expense
- These costs include all physical merchandise handling and logistics employees, their operating facilities, their equipment and any other resources they use.
- On average operations spend 6.15% of sales here. The double-digit profit club uses 1.6% of sales less cash resources at 4.55% of sales. Top-tier performers are as low as 4% of sales.
- Total Operating Expenses
- Total Operating Expenses add up all expenses that are reduced from Gross Realized Margin. It is total of Admin, Occupancy, Advertising, Selling, Service, Delivery, and Warehousing.
- Whenever I see an in-control operation that is running smoothly, without chaos, with a total operating expense ratio of under 40% of sales, I think: Potential Goldmine.
- Average performers are at 40.14% while the double-digit profit club is very lean at 36.2%. I don’t get alarmed when I encounter an operation at 42% or 43% provided they are spending in areas that add value to their business and employees. Operations who are close to 50% in this metric are usually pulling out profit early or are running a broken business model.
- Net Operating Income
- This is the percent of every sales dollar that remains after all costs of goods and regular operating expenses are deducted.
- Average operations show 5.88% Net Operating Income. The double-digit profit club has more than 100% more profit at 12.63 % Net Operating Income. And, the select top-tier operations for this metric have 14%.
- Net Income before Tax
- This is the bottom-line. Other non-operating income, non-operating expenses and interest expenses are added and deducted. Typically, there is little in either category with the exception of those operations that rent out part of their facilities or who are carrying a large debt and paying significant interest.
- Overall the bottom-line is not significantly different from Net Operating Income. Average operations show 5.67% Net Income before tax. The double-digit profit club has 12.54 %. And, the select top-tier operations for this metric still have a 14% bottom-line.
When I discuss improvement possibilities with business people, they are sometimes skeptical. Sometimes they don’t believe me when I say, you can grow gross margins by 8% of sales. Or that they can increase sales volume by 25%. Or, they can grow profits by 7% of sales. Or, they can double their cash position. Not everyone believe me — at first. It is true for many that vast improvement opportunity exists. I’ve seen it happen time and time again. I’ve been a part of it. I hope that these metrics inspire you to look at your business analytically. I hope you are motivated to seek action to reach new heights.
In our 2017 Retail Observations we also looked at several selling and inventory metrics. These will be published in another well respected industry publication: Furniture World and made available along with these Financial Metrics to the members of the HFA.
Finally, for a limited time, we will be offering retailers an Opportunity Analyzer. You can get a customized side-by-side comparison report with all these metrics. Plus you can get a one-one web-meeting. In the web-meeting we will present and discuss our observations and your opportunity. Just contact me if interested in getting some guidance with improving your profitability and cash flow.
Furniture World Magazine
Volume 147 NO.4 November/December
By David McMahon on 11/29/2017
When I travel around the world consulting with retailers, I often encounter three types of operations:
1. Those that take decisive actions to grow their sales volume, margins and profitability simultaneously.
2. Those that are happy to operate in the averages, control costs and take little risk.
3. Those that react in real time to problems and opportunities, but have aspirations for higher profits and ongoing improvement.
If you are a #3 type retailer who wants to continuously improve, but needs to know where to start, this article is for you!
It is obvious that the first type of operation that has a handle on its business model will almost always be in the best competitive position. But which type of operation out of the remaining two will be second best? It’s my experience that the reactive operation (#3) that has aspirations for improvement is in a better position than an operation that is both risk and change averse.
Chaotic businesses can and do become highly profitable. What’s required is that store managers start to focus on important tasks instead of day-to-day distractions. In contrast, retailers whose business models focus mainly on cost-cutting, rarely stand the test of time.
So, if you are a #3 type home furnishings retailer who aspires to continuously improve but need help focusing on what to improve and where to start, this article is for you. I’m speaking to those who wish to be decisive and take action.
Inventory & Selling
The two biggest elements of retail success are inventory and selling.
In 2015 and 2016, I conducted an industry-wide survey of operational and financial numbers to formulate key retail performance metrics. In 2017, I tracked similar data from furniture retailers across North America. The 2017 findings are consistent with those of years past. This article includes several metrics that you can use as benchmarks for your performance. Compare them with your operating numbers. The idea is to look at where your operation falls short. Only then can you focus on closing the gap by taking decisive action to generate improvement.
Inventory Metric Observations
The observations tabulated on page 12 are expressed in three column groupings:
Average of all performers
- Average of double-digit (net income before tax) performers
- Average of top-tier performers (top 10 percent).
What follows are key takeaways about what is required to increase profits based on the inventory metrics collected in this study.
1. GMROI: To summarize, GMROI is annual sales minus cost of sales, divided by inventory (or annual gross margin dollars divided by your inventory). It is your single most important performance indicator, because maximizing the amount you produce after a sale, while minimizing the inventory investment, directly translates to more cash.
In the second column of the table, we see that the average of all of retail operations observed in 2017 produced a GMROI of $3.26. This means that for every dollar retailers invested in inventory, $3.26 in gross margin dollars were produced. This is what those operations on average had left over to pay for all their operating costs and to make a profit.
For example, if an operation has $1 million in inventory on average, and has a GMROI of $3.26, it will produce $3.26 million in gross margin dollars. This may sound like a lot, but an average operation only has about a five percent net income before tax, so this operation would have little left over to add to cash flow.
The third column of the table labeled “Double Digit Profit Club” lists GMROI for those operations that produced a net income above 10 percent before tax. These businesses produce an average GMROI of $4.01. That’s only a 27-cent difference. Not a lot, right? Wrong! That 27 cents is worth $270,000 in additional gross margin dollars for the same $1 million in inventory. If operating costs are exactly the same at two stores, one an average profit performer and the other a double digit profit performer, and they both have the same level of inventory, the high profit store will have an extra $270,000 going directly to the bottom line!
The third column displays the “Top-Tier” of businesses observed with respect to the metric. With GMROI, we see some companies reaching and exceeding $4.66. In fact, it is not uncommon to work with operations that keep this number above $6.
2. Turns: Inventory turns are similar to GMROI, except this metric takes annual landed cost of goods and divides it by inventory. If a company has a gross margin percentage of 50 percent, GMROI and turns will be equal.
Here we see that average operations turned inventory 3.74 times per year while the double-digit club produced a slightly faster turn at 3.8 times per year. The top operations turned considerably more than both, at 5.81 times.
Turns can also be expressed in terms of days to sell through inventory. Take 365 days and divide that by annual turns. If a retailer generates 3.8 turns, it takes 96 days to sell though its inventory. An operation turning inventory at 5.81 times will sell through its inventory in just 63 days, 33 fewer days.
3. Inventory to Sales: This is the percentage of inventory an operation carries in relation to its annual sales volume. The theory here is that if you can carry less inventory and sell more, profits and cash flow increase. This is mostly true, however, there is also a line between too much and not enough. In any inventory-carrying operation, a certain level of merchandise must be maintained or sales will be lost.
Depending on the individual business model, some operations will require more inventory, and some will require less. The important thing is that an operation understands its model, its optimal level of merchandise, and maintains inventory dollars at a comfortable level.
The table shows that the average inventory carried as a percent of sales was 15 percent. The double-digit club held 14 percent. Plenty of highly profitable stores hover around 20-25 percent, but their merchandise is usually at a higher average cost point.
Selling Metric Interpretations
4. Close Rate to Traffic and Opportunities: Close rate is important because it’s a productivity measure taking into account customer-salesperson engagements and the number of leads (traffic) produced. There are two types of leads we typically measure:
- Traffic: The number of customers in the store
- Opportunities: The number of customers engaged by salespeople.
Traffic and opportunities should be the same number, but in the real world, they seldom are. This is due to not having enough salespeople to cover traffic at peak times. For this reason, we measure both traffic and opportunity close rate. The difference between the two is missed opportunity, which is a measure of sales floor ineffectiveness.
In the table, “Close Rate on Traffic” is the same for both average and the double-digit profit club at 29 percent. “Close rate on Opportunities” is 38 percent for the double-digit profit performers and 34 percent for the average group. This could mean that the highly profitable companies are better at bringing customers to a conclusion. However, they may be understaffed, missing recording some traffic as opportunities.
Close rate is one part of the sales equation of Sales = Traffic (or Opportunities) x Close Rate x Average Sale. Each piece of the equation should be tracked and managed overall, by store, by critical department, for brick-and-mortar and online, by individual, and by sales teams.
5. Average Sale: This is a premier metric that should be constantly monitored and improved. It can vary significantly from one salesperson to the next and from one store to another. However, the averages do not tend to vary much from one merchandising style to the next. For example, contemporary showrooms have similar average sales to traditional showrooms. With that in mind, this metric and all the others presented are of value across all types of home furnishings and mattress operations.
Looking back at the chart you will see that the average performer’s “average sale” is $1,251. The the double-digit profit club figure shown in column #3 is $2,091 and elite performers for this metric produced an average sale of $2,394.
There are many ways an operation can grow this number. My advice is to really dig into the details, then look for incremental improvements to create significant, lasting impacts.
6. Revenue per Traffic and per Guest: This is the value of each customer visit. It is used for marketing purposes as well as sales performance and coaching.
Similar to close rate, this metric is tracked for both Traffic and per Guest (Opportunity). You can use this metric to highlight the value of an extra opportunity. The average revenue for a guest listed in the second column is $444. So, for an average store, if 100 customers are missed over the period of one month. That can be seen as $44,400 (100 x $444) in lost business.
One big task for sales managers should be to bridge the gap between sales per traffic and sales per guest. Only then can they be more confident that all their customers are being served and that they are staffing appropriately.
For coaching purposes with individual salespeople, however, sales per guest is the metric sales managers should use because it is the actual number of customers salespeople documented they interacted with.
7. Written Sales per Selling Square Foot: This is used as a measure of retail space productivity.
Average performing stores produced $185 in sales per square foot (see the table). Our double-digit profit group produced $32 more, at $217. The top-tier for this metric came in at $371.
Let’s see how this metric can be used. Suppose a store has 35,000 square feet and an average of $185 written sales per selling square foot. Its annual volume would be $6.475 million ($185 x 35,000). If it had the average sales per square foot of a double-digit profit store, it would generate an additional $1.12 million ($32 x 35,000). Do you now think it might be worth looking into developing a strategy to move from column #2 in the table to column #4?
8. Written Sales/ Employee: With this metric, higher is not always better. An operation should seek the optimal number of total employees to serve its customers and support future business growth. That said, comparing against average and double-digit profit is important.
Average stores have written sales per employee of $221,444/person. The double-digit profit club produces more revenue with less people at $281,587/person.
So, for example, an operation that does $6.5 million in annual sales would operate with 23-30 people total if they were in the average to high-profit range.
9. Written Sales/ Salesperson: Retail furniture and bedding operations should staff to cover their high traffic times and their obtainable goal volume.
Again, a higher number here is not necessarily better. Finding a sweet spot to serve your customers to the desired satisfaction level will maximize your top line.
For this metric, average stores produced $604,483 per salesperson per year, while the double-digit profit club produced a bit more sales with less people at $651,460 per person. The metric shown in the chart for the “top tier” at $921,996 is too high in my opinion. It has been proven time and time again that top tier retailers can produce higher volume with more people and average-to-high profit per salesperson. Top salespeople’s performance are rarely affected by more salespeople. It holds true that most operations will usually produce $50,000-$60,000/salesperson/month.
As an example, an operation that does $6.5 million in annual sales would have 10 or 11 salespeople if it were average to high profit.
Many furniture store operations have pulled themselves out of huge debt to become cash flush. Good operators have become leaders in their categories and marketplace. It takes time, of course, but it is possible.
When working with the performance indicators presented here, develop your strategy and specific tactics for improvement. Commit to ongoing measurement, never-ending improvement, and adopt a CAN-DO attitude. Don’t go at it alone. Find partners in your industry that will motivate and strategize with you. Manage your two businesses: your present business and your future business.
Our 2017 Retail Observations, also looked at several financial metrics that can be obtained by emailing firstname.lastname@example.org.
Offer: For a limited time, David McMahon is offering retailers an Opportunity Analyzer. You can get a customized side-by-side comparison report with all of these metrics along with a useful one-on-one web meeting.
David McMahon is a retail financial and operational professional and Founder of PerformNOW. He directs multiple consulting projects, is proud to lead 6 business mastermind performance groups: Ashley Gladiators, Kaizen, Visionaries, TopLine Sales Managers, Lean and Sigma DC Operations. He is Certified Management Accountant and Certified Supply Chain Professional. You can connect with David at:
Furniture World Magazine
Volume 149 NO.5 September/October
By David McMahon on 9/29/2019
This sales formula for growth will help you take actions that will directly impact the strength of your retail business.
One of the most common questions I get from my retailer clients is, “How are businesses doing out there?” They often add, “I’ve heard that it is tough for many retailers, business is flat, and few are growing.”
My response has remained pretty much the same over the past many years. Aside from during the great recession, many businesses in retail have been flat. However, there are some that have managed to grow significantly.
Why do some retailers grow, while others plateau or decline? This article will answer that question and hopefully help some of you get out of a rut and start to grow again.
The purpose of marketing is to increase customer engagement to then grow sales. Keeping that in mind, the most recent article in this series (July/ August 2019 issue, “Marketing Effectiveness Metrics Marketing“), looked at tracking customer traffic in three ways:
- By new customers
- By repeat customers
- By personal trade repeat customers
Soon after the article was published, I heard a podcast interview with Kevin Systrom, the founder of Instagram. You can find it at (https://mastersofscale.com).
Systrom presented his formula for growth. “It’s how many new people came in the door, how many people decided to stop using you, and then how many people who used to use you decided to use you again. Plain and simple, those three terms equal net growth,” he said.
Given that it is difficult to track which customers “have left you and then decided to come back to you”, the idea presented in the previously mentioned July/August article of counting traffic as a driver of growth seems worthy. And, to make this traffic counting meaningful, retailers should track average sale and close rates by the three categories of traffic that are New Customers, Repeat Customers and Personal Trade Customers. The reasoning for this is that there are different strategies and likely different ROI’s depending on each customer relationship.
With all this in mind, my sales formula for growth is expressed in Figure #1 below.
This is in contrast to how many retailers in our industry measure growth. They use the simple formula for change: (Sales Now – Sales Before) / Sales Before. This is OK, however, by just using this change formula, the underlying reasons for growth remain mostly guess work.
Salespeople & Capacity
Most furniture retailers’ business models rely exclusively on salespeople serving customers. Experience has shown that individual salespeople can improve but, as a whole, a sales force can do so only marginally. This has to do with capacity. The capacity per salesperson is the average sales per salesperson dictated by your business model. Sure you may have a person who writes $1.5 million per year. But, you likely cannot find a way to bring everyone on your sales team up to that level. It’s just not the way averages work. With this in mind, if you have five salespeople and your average is $650,400 per salesperson, your sales are $3.25 million per year.
Yes, you can improve. However, those retailers that really grow their furniture businesses, add additional salespeople, find ways to get them customers, and achieve the same or better sales / salesperson averages.
|Those retailers that really grow their furniture retail businesses, add more salespeople to their companies, find ways to get them customers, and achieve the same or better sales/ salesperson averages.|
Since sales force growth is integral to company growth, the “sales formula for growth” is amended in Figure #2 above to include the number of salespeople. Also, if you prefer to track sales per guest (SPG), you can substitute SPG for AS x CR (average sale x close rate in Figure #2.
Ways Businesses Grow
Before you start making predictions on the economy, or the internet and the way people shop (which do play a part, but in which you have little control), consider these 5 questions:
- Has the number of salespeople you employ grown?
- Has the number of stores you operate or categories you offer expanded?
- Has your business model been improved?
- Has the mix of your team been improved?
- Have your management team and systems improved?
Adding one salesperson,
and taking steps to increase the average monthly sales per salesperson helped this business go from habitually flat to growing.
When “no” is the answer to many of these questions, you are unlikely to have experienced substantial growth.
Another factor that affects business growth is when other businesses decide to grow in your market area before you. When competitors for your customers’ share-of-spend are answering “yes” to the above five questions, they will hurt your growth potential.
Below is a list of some actions that commonly result in growing volume:
- Adding salespeople and staffing properly to existing traffic
- Adding salespeople and staffing properly to desired sales goals
- Decreasing employee turnover
- Adding retail locations
- Adding categories
- Adding new marketing programs
- Increasing customer follow-up
- Changing the business model
- Changing employees
- Changing managers
- Changing locations
- Changing the marketing mix
- Changing merchandising and/or display presentations
- Changing and improving on systems and procedures to make selling easier.
Aside from decreasing employee turnover, all the growth actions start with add, change, increase, or improve. There are few actions that would result in sales growth that start with cut, reduce, do less, or do the same thing.
Let’s look at a quick case example and apply my sales formula for growth with salespeople (SFGS). Let’s take the case of a business we will call XYZ, stuck at $3.25 million dollars in annual sales volume. This furniture retailer employed five salespeople on average, was good at counting traffic and had a functioning opportunity counting system that tracked close rates, average sales, and SPG by customer type. The company had tried sales training, changing managers, tweaking their selling system and changing up the marketing mix. These actions moved the needle initially. But eventually, they ended up right back where they started. The sales training seemed to have little effect on results in the long run because salesperson turnover was too high. Year after year they could not beat an average sales number of $650,000 per year, $54,000 per month per salesperson. Finally, XYZ’s owner decided enough was enough and did three things:
- Mandated and managed the use of a selling system that was part of the sales training they invested in.
- Increased and systematized their customer follow-up.
- Added 1 salesperson (averaged 6 at all times).
After one full year of operating this way, this is what happened:
Customer traffic increased by 50 people per month and salesperson turnover dropped. The store’s average salesperson per guest metric improved. The average monthly sales per salesperson increased marginally from $54,000 per month per salesperson to $56,000. Annual sales per salesperson increased from $650,000 to $672,000 per year. These steps helped this business grow from $3,252,500 million in sales to $4,032,000. That’s a 24 percent increase in sales volume (See Chart #1 below).
For retailer XYZ, adding one additional salesperson and taking steps to increase the average monthly sales per salesperson helped this business go from habitually flat to growing.
Improvement starts with understanding your situation better, making decisions to improve that situation, and then executing those improvement actions.
David McMahon is a retail financial and operational professional and Founder of PerformNOW. He directs multiple consulting projects, is proud to lead 6 business mastermind performance groups: Ashley Gladiators, Kaizen, Visionaries, TopLine Sales Managers, Lean and Sigma DC Operations. He is Certified Management Accountant and Certified Supply Chain Professional. You can connect with David at:
Furniture World Magazine
Volume 149 NO.6 November/December
By David McMahon on 12/7/2019
Tracking employee turnover will lead to greater sales and profit. It will, over time, create a vastly better organizational culture.
We can’t find good people!
People don’t stay around long.
The time to get a new employee up to speed seems too long.
My sales are flat because I don’t have enough people.
I get too many customer service issues due to mistakes.
These are statements I regularly hear from individual clients and in performance groups. Finding and keeping good employees are top challenges for retail business owners, sales managers, and warehouse operations managers.
|To show this equation in action, let’s look at a company we will call XYZ Furniture that has three major departments: Sales, Distribution, and Administration.|
I think we all can agree that lowering employee turnover is extremely beneficial to any business. However, when business owners are asked what their turnover percentage is, they usually give general answers such as, “Too Much!” When sales managers and warehouse managers are asked what their departmental turnover percentage is, they often respond with blank stares. They have no idea or just guess.
Can you imagine, if an owner was asked the question, “What is your net profit margin?”, and the answer was, “not enough”, or, “I don’t know”? Turnover is a critical business metric just like profit margin and yet it is largely untracked. In fact, turnover directly impacts sales and gross margin. So, if you want to improve sales, profitability, and cash flow, start by measuring employee turnover.
There are theories and excuses regarding how turnover should be measured. Some say that it should only be measured for employees who remain employed for more than a couple days, for example. To me, that may be fudging the numbers to cover up poor hiring practices.
Here is a simple and accurate equation to use. Calculate the number of employees who left over a certain time period, divided by the average number of employees for that time period, expressed as a percentage.
Employee Turnover percent, for a period of time = employees who left or were let go for any reason / [(Employee number, at the start + Employee number, at the end) / 2)] x 100.
To show this equation in action, let’s look at a company we will call XYZ Furniture that has three major departments: Sales, Distribution, and Administration.
The table below lists the annual number of employees for a 10 million dollar company and the corresponding turnover rate. The highest turnover is the Sales department with a 57 percent turnover. They had eight salespeople that left the business during the course of a 12-month period. Three were let go and five quit. They started with 15 salespeople and now have 13, so there is an average staff size of 14 salespeople.
The other departments fared a bit better with 42 percent turnover in the DC and 31 percent in administration. The company total is 46 percent. You might think this is terrible. I agree. Unfortunately, it is a common and a totally realistic retail example. The National Retail Federation reports that according to a survey, employee turnover was 60 percent in 2018. The national average across all industries is 15 percent according to a separate study by Compensation Source. From my personal experience with performance groups and retail consulting clients, the companies with the lowest turnover are at 20 percent. Only a few are under that, and the highest are at 100 percent!
The Cost Per Employee
To illustrate the costs of turnover, let’s consider the sales department illustrated in the chart on the previous page for XYZ Furniture.
Search and hiring costs: This includes the use of sites such as Indeed, Monster, Linkedin and Timetohire. Also, recruiting agencies, plus digital and traditional advertising. Add to that any referral and signing bonuses paid. There are also costs for background checks and drug screening. And, don’t forget the hidden costs of time. Managers need to spend time reading resumes, making calls and interviewing. The cost might be between $1,000 and $10,000 per new employee.
Onboarding and training costs: This will include a fixed salary paid to new commissioned sales associates until they produce enough sales volume to cover their draw. There are also payroll and HR set-up costs. New sales employees typically need four to eight weeks to become productive. And, add to this precious time spent by management and senior salespeople who must mentor new employees. My cost estimate for onboarding and training for XYZ Furniture is between $6,000 and $10,000 per employee.
|The companies with the lowest turnover are at 20 percent. Only a few are under that, and the highest are at 100 percent!|
Loss of sales costs: This is an economic opportunity cost that is difficult to quantify. The cost of lost revenue is hidden. It is, in my opinion however, the costliest issue with turnover. In this example eight salespeople left. Five of those quit. That means five people may have been producing adequately, since the company did not let them go. The time lag between when an employee leaves to when his or her replacement is hired and becomes productive, can be between one and three months or more. During this time, either all other salespeople need to step up their level of productivity, or customers will go under-served and unsold. Generally, sales per individual salesperson does not increase much when people leave, so furnishings retailers experience a dip in sales during turnover periods. In the case of XYZ Furniture’s sales department, the number of employees at the start of the period (15) was more than at the end of the period (13). So, it’s likely that the total sales volume fell. My estimate of the cost of lost sales for this business is between $50, 000 and $150,000. At cost less variable selling expenses (cost of goods, commissions, credit fees), the business would lose between $20,000 and $60,000 per turned over employee.
The total cost of turnover: Based on the previously given cost estimates for employee search, hiring, onboarding, training and loss of sales, the cost of turnover per salesperson for XYZ Furniture could be between $26,000 and $80,000.
I don’t think there will be any debate that if this company were to apply resources to cut turnover, it would increase its profitability. In this example, if it was able to keep three of the five good sales employees who left, it could add $78,000 to $240,000 to its bottom line. At $10 million in revenue, the median profitability increase would be 1.62 percent.
Start tracking by department each month for the prior 12 months. Establish your benchmark over a few months of tracking. Then define and implement improvement actions.
Actions to Decrease Turnover
Searching Google will reveal many articles and books written on each one of the following actions. Here is a quick list of some top considerations as they apply to our industry:
- Hire Well. Getting it right on the front end will save money and disruption down the road. This goes both ways, because sometimes the right hire is passed over due to poor interviewer recognition of talent or a clash of personalities.
- Train to Succeed. An organized and effective success system needs to be put in place. Retailers often complain that the person they hired is “not the same person” they interviewed. My question back is, “Were the promises you made to the candidate during the interview process fully realized?”
- Employee Buy-in: Ensure existing employees are 100 percent committed to helping new employees succeed. Do not allow intimidation from current employees. “Scaring off” new hires is rampant in this industry, especially among salespeople.
- Management Leadership: Ensure your managers are also leaders. Management and leadership are different. The best are able to do both. Higher turnover will result from managers who are lacking in leadership abilities.
- Employee Values: Good people only want to work with others who share similar values. Build a team with people who have workplace attributes that will complement and be well received inside your organization.
- Salary & Growth: Pay competitively and show your employees a path for advancement and increased compensation.
- Elevate Learning. Minds must be stimulated. Employees will get restless if there are scant opportunities for mental stimulation and career advancement. If you hire people who are motivated to succeed in your organization and give them the necessary tools, you will keep the employees you want to keep.
- Reviews & Meetings: Conduct performance reviews and improvement meetings separately. Combining these can have negative effects.
- Grow Your Business. People want to be a part of growing companies. If you want to attract and keep the best talent in your industry, you must be among the best yourself.
- Remove Bad Attitudes. Firing employees who have bad attitudes will increase your turnover numbers in the short term but lower them in the long run.
Employee turnover is one of the most important retail business metrics and yet it is rarely tracked. First, start tracking by department each month for the prior 12 months. Establish your benchmark over a few months of tracking. Then, define and implement improvement actions. If you make this work, you will not only find that you have less turnover and greater sales and profit, you will also build a much-improved organizational culture.
David McMahon is a retail financial and operational professional and Founder of PerformNOW. He directs multiple consulting projects, is proud to lead 6 business mastermind performance groups: Ashley Gladiators, Kaizen, Visionaries, TopLine Sales Managers, Lean and Sigma DC Operations. He is Certified Management Accountant and Certified Supply Chain Professional.
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