Art of Retail Management: Habit: Attend to Employees' Productivity
In a recent column, I shared the "Seven Deadly Sins of Retailing." The topic generated so much feedback, that I write this one in the same vein, except I'm moving from what not to do, to what to do. I was inspired by a retailer friend who pleaded, "Enough about what I'm doing wrong! Tell me what I should do." Here then are some habits of effective retailers-not surprisingly there are more than seven.
This month's habit: Attend to Your Employees' Productivity. When employees are productive, you should reward them. If you don't, they will find an employer who will. If they are not productive, you should be teaching them how to produce more. If you don't, they may drive you out of business.
Do you regularly ignore your employees' productivity? If so, I urge you to treat that inattention as a bad habit. Decide to break it, for it can kill your business! How well I know how hard it is to break bad habits! Even when we will ourselves to overcome them, we sometimes act involuntarily. The best way to eliminate a bad habit, like your inattention to employee productivity, is to replace it with a good one. Aristotle wrote, "We are what we repeatedly do. Excellence, then, is not an act, but a habit." Therefore, you achieve excellence when you successfully install a good habit over a bad one.
It's an excellent habit to regularly measure your employees' productivity with objective and relevant metrics. When employees know your metrics are objective and relevant, most will respond positively. The following are examples of measures that are objective and relevant:
- Sales per employee. One of our consulting clients employed 11 people (not counting installers) who collectively generated only $1.1 million in annual sales. That's $100,000 of sales per employee. According to the World Floor Covering Association,
the industry average is close to $230,000 per employee. I concluded that this client's employees are mostly sitting around reading the paper, snacking, and playing computer games. I recommended he fire half of them. He protested, "But, they are family." I said, "If you go out of business, no one in your family will have a job."
- Payroll as a percent of Gross Margin. Payroll is your biggest expense. What percent of your gross margin are you spending on Payroll (including salaries, wages, taxes, benefits, etc.)? The industry average is about 45%. An industry expert told me if you go over 50%, you are headed toward insolvency. What's your payroll percentage? If you fall beyond the industry average are you paying the more productive employees more, and the less productive employees less?
- Sales per salesperson. The industry average for stores that emphasize retail sales is nearly $500,000 per salesperson. I've worked with dealers whose salespeople produced half that, causing the dealers to struggle for cash. When I consulted for Sears, their sales people were not productive and this lead the retail giant to quit selling installed floorcovering. You want salespeople to sell $500,000 a year, but you also want them to sell at your prices, not at a discount.
- Average Ticket. I know that few dealers measure their average ticket. I advise you to measure it, because it reveals how productive each salesperson is. Average ticket discovers the salespeople who sell at high sq/ft. prices, and those that use price as a crutch, selling mostly products on special. The industry's average ticket for carpet is $1,938 at $2.69 per sq/ft; while salespeople at high-profit firms sell at 15% higher prices ($3.07 per sq/ft). The average hard-surface ticket is $1,796 at $3.76 per sq/ft.; while salespeople at high-profit firms sell at 70 percent higher prices ($6.37 per sq/ft.). My goals for you: sell higher average tickets and higher per sq/ft. prices than you did last year, and push your average sq/ft prices above your average price-point.
The size of your average ticket largely determines your store's profits, because nearly the entire increase falls to your bottom line. (Your costs stay fixed even as the dollar volume increases.) Raising the average ticket can be very profitable. Why do you think they train fast-food clerks to always ask, "Do you want fries with that?" (And if you do order fries, they immediately say "Large?")
- Closing rate. Closing rate measures the percentage of shoppers who purchase. (Some retailers count the percentage of "measures" or bids they convert into a sale. That is a different closing rate.) This closing rate measures the percentage of people who walk into your store and buy from you. Obviously, it corresponds to the quantity of your sales. More useful to you, it indicates the quality of your customers' experiences. You want to know your closing rate.
At an average retail store, the closing rate runs around 28 percent (per the Profit Planning Group). Below 20 percent is considered poor and 40 percent is excellent. It's like baseball batting averages: selling to four in ten shoppers translates to a .400 batting average-enough to put your staff in the Salespersons Hall of Fame (if there was such a thing.)
As with "average ticket," increasing your closing rate spikes profits, because the costs associated with each new sale add no more fixed expenses or sales salaries. You pay only the transaction costs, and the rest fattens the bottom line.
Increasing your closing rates also increases your return on sales-related expenses, like advertising. Example: Say you spend $10,000 to drive 200 people to the store and the closing rate is 20 percent. Those 40 sales average out to $250 each ($10,000 divided by 40). If you manage to raise the closing rate by just one more in ten, the conversion rate jumps to 30 percent. Now, that same $10,000 yields 60 sales, at a cost of $166 per sale. Thus, your cost-per-sale falls by $34. That's $34 more net profit for each sale. A 40 percent closing rate would yield 80 sales at a cost of $125 each. That is leverage! And, that is also beautiful, basic math.
Having reviewed the common measures of productivity, I ask you, "When will you apply them to compute your employees' productivity?"
Of course, by itself, measuring will not raise your employees' productivity to its potential. But it will remind them that you are watching their performance. That alone will spur them to try and increase what you are measuring. Perhaps most important, it will alert you to take the right steps.
Calculating productivity and profitability can be complex; that's why we often spend months working with clients to help them understand and apply the right forces to increase theirs. Employees need resources to produce their full potential. These resources flow from two sources: (1) those the employees bring to work and apply-their motivation and abilities; and (2) those the company supplies. These resources include challenging goals, valued products and services to sell, strong merchandising, good store traffic, good equipment, training, an effective compensation system, the company's reputation, and, most of all, an inspiring leader. When you provide the right challenges and resources, you can expect your employees to invest their best abilities.
Of course, your challenges will produce tension. Some tension is productive; other tension is destructive. Here's the key: avoid tension that breaks employees' spirit - as when the boss expects more output than employees have resources. Instead, apply tension that builds their spirit - as when the boss sees employees' untapped potential, expresses confidence, asks for more output, and ensures that employees receive the right resources and moral support. For their happiness and yours, accept nothing less than everyone's best effort.
While you may love your employees like family, you can't afford unproductive employees. I invite you to adopt a new habit - measure their productivity, now and forever. Excellence in this area is not a single act, it is a habit. A very good habit.