I've been working in retail merchandising for high street retailers for the last 16 years. In a nutshell, merchandising is all about stock control. Our merchandiser mantra is simple: the right stock in the right place at the right time. Of course, this often earns us the nickname "fun police" from buyers and product teams as we had to manage stock carefully so sometimes putting the brakes on launching new, exciting products.
Our job involves forecasting how well we think products will sell. If the numbers don’t add up, launching a new product might mean ending up with slow-moving stock that could hurt cash flow. But it’s not all about the math, decisions were a team effort between merchandisers and buyers, considering trends and marketing activities too. Still, launching new products had to be done thoughtfully, so this meant not launching everything we wanted.
Despite all this experience, I have to confess that when I started my own small product-based business, I didn't really think like a merchandiser. I ignored my own merchandiser logic and assumed that having lovely products was enough to attract customers. Spoiler alert: it wasn't!
In this blog, I'll share why thinking like a merchandiser and understanding your KPIs (Key Performance Indicators) is crucial for your small business and how it can make a big difference in your success. I've also included some key calculations that can help you make sure you don't make the same mistakes I did!
Understanding your Website KPIs
Running a small business is about more than just having lovely products. You need to drive traffic to your website and make sure it's easy for visitors to navigate so they can find and buy your products.
That's why regularly checking your website KPIs is so important. KPIs show you where to focus your time and money. For instance, if you're only getting 10 sessions a week on your site, adding new products won't help much. Instead, you need to work on improving your SEO. This includes boosting your domain rating, increasing your website speed, and using the right keywords so Google can rank you higher.
Adding products without increasing traffic means it will take a long time to sell them, causing long-term problems. This can reduce your profits and tie up cash in unsold stock, making it harder to reinvest in your business and even pay yourself. That's not sustainable in the long run.
An Example From My Own Product Business
When I first launched my small business, I made a classic mistake with some beautiful handmade mugs from Portugal. I thought these mugs would be the key to attracting customers to my website and would sell like hotcakes. However, my domain rating was low, and my SEO was poor.
As a result, the mugs weren't visible enough online, and it took me over six months to sell them. This meant my overheads ate into any profit I made from selling them, and I didn't have the cash to purchase more once they sold out.
To put this into context, if you're only selling one mug per month at a £10 profit and your overheads (fixed costs like website fees, insurance, etc.) are higher than this, all that profit is gone. To increase your profit, you need to sell them faster. However, if you're only getting 100 sessions per month with a 1% conversion rate, you're only making one sale per month. This means it's unlikely you'll sell more than one mug a month.
Therefore, if you keep buying more products and stocking up without boosting traffic, you're just adding to your cash flow problem.
What I Should Have Done Instead of Buying Mugs
Buying the mugs wasn't a complete disaster since I used a supplier discount and didn't purchase too many, so I didn't lose too much money from the mistake. However, if I had done this with multiple products, it could have caused significant issues. This experience taught me to be more careful about where I invest and to remember my merchandising roots.
Instead of buying the mugs, I wish I had invested that money in sending bloggers gifted products from my current range in exchange for reviews and backlinks to improve my SEO. This would have been a step towards increasing my traffic to my website. (If this is an area you need to work on, be sure to check out my other blog post - Three Ways I Boosted My Product Website's Domain Rating)
I'm not saying you shouldn't launch new products as injecting newness into your business is important too, but you should consider your KPIs to ensure you do it in a controlled way that supports the long-term stability of your small business. Also, you should think about selling any old slow-moving stock before introducing new items, but that's a topic for another blog!
Applying Merchandising Metrics
Understanding your KPIs and how your products are performing is crucial for making informed business decisions. Here are some key merchandising terms and calculations that can help:
- Sessions: The number of people visiting your site.
- Conversion Rate (%): The percentage of sessions that result in an order. A good target can vary, but according to Shopify, a conversion rate between 2.5% to 3% is generally good. Calculated as: sessions / no of orders.
- Rate of Sale (ROS): The number of sales per product per week. Calculated as: sales units / number of products / weeks.
- Average Cover: How many weeks of stock you are holding. Calculated as: stock / ROS.
- Sessions: 100 per week
- Conversion Rate: 1% (100 sessions * 1% = 1 sale per week)
- Rate of Sale (ROS): If you have 20 different products, your average ROS per product is 0.05 (1 weekly sale / 20 products).
- Cover: If you have 20 mugs in stock, your cover is 400 weeks (20 in stock / 0.05 ROS), which is terrible for your cash flow!
To sell one mug per week at a 1% conversion rate, you would need 2000 sessions per week. This means if you’re not hitting this number, you should focus on growing traffic rather than adding more stock.
- Required Orders for Target Sales: 1 ROS * 20 products = 20 orders per week.
- Required Traffic: 20 orders / 1% conversion rate = 2000 sessions per week.
Therefore, investing in growing your traffic is essential to improving your sales rate and ensuring better cash flow.
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Thanks for staying with me to the end, Hopefully, I haven't lost you with those last calculations! I know most small business owners are amazing creatives and might not get too excited about numbers, however, understanding these metrics is vital for your business's long-term stability and success.
It might not sound fun to everyone, but I’m all about the numbers and analysis! If you’d like some help making sense of your numbers, feel free to drop me a message or you can purchase a quarterly analysis of your sales through my ready-to-buy projects page. This is perfect for planning around key events like Christmas.
Let me help turn those numbers into insights that help your business thrive!