KPI’s You Need to Track
by Stephen Lett
What Key Performance Indicators (KPI’s) are critical to a catalog business? Which ones should you monitor? What can you learn from tracking these KPI’s on a daily, weekly and monthly basis? How can you make changes and implement improvements as a result of what you learn? Selecting the KPI’s you feel are critical to your business and tracking them on a consistent basis is the subject of our column this month. We have identified ten Key Performance Indicators we feel are critical to any catalog business so you will know where to focus your attention.
Key Performance Indicators are quantifiable measurements, defined and agreed to in advance, which reflect the critical success factors of a company. They will differ depending on the catalog company and their specific objectives and needs. A business may have as one of its Key Performance Indicators, for example, the gross margin ratio or contribution ratio or net income. KPI’s must reflect a company’s goals. They are what the company feels are their critical success factors.
There are many KPI’s you could track. Select those that are most critical to the success of your business. If the KPI is not quantifiable it should not be tracked. For example, if you say a KPI is to “improve customer service” this, as stated, cannot be measured. Be sure to pass on “so what” KPI’s which might be able to measured but little if any correction action can be taken. Don’t try to track too many KPI’s either. This is not about the number of KPI’s you can identify in order to impress your boss but rather it’s about the quality of the KPI’s critical to your business.
Let’s now take a look at a few KPI’s which are common to catalog businesses. We will also suggest ways to track these KPI’s in order to know if we are on target or if we need to take corrective action. For purposes of this article, we will assume an annual budget is in place and we are now trying to identify ways to measure and track against these predetermined objectives. We will want to track these key performance indicators against budget and against the previous year (tracking against your annual budget is more important that comparing to last year’s results because the budget defines where you need to be in order to meet your financial objectives).
- Gross Demand. Dollars and orders are obviously an important KPI to measure on a daily basis. Measuring against your budget is more important than measuring against your prior year due to changes you might have made in your plans, i.e., circulation, merchandising, etc.
- The Revenue Per Catalog (RPC) Mailed. This is a quantifiable figure which is easy to measure on a weekly, monthly and yearly basis. This can be an overall measurement which includes the results of all mailings. It can also been measured and tracked per mailing (suggested). Since a great deal of business comes in over the Web, Internet attribution needs to included as part of our KPI; both target and actual. In order to track the RPC, we generate a Percent Complete Report weekly which provides this information. A summary page for this report might be as follows:
ABC CATALOG COMPANY CHART "A"
07/21/03 Drop #1 $1.72 $1.80 $1.92 08/25/03 Drop #2 $1.24 $1.30 $1.31 09/22/03 Drop #3 $1.49 $1.60 $1.81 09/29/03 Drop #4 $1.56 $1.55 $1.54 10/20/03 Drop #5 $1.57 $1.65 $1.65 11/10/03 Drop #6 $1.72 $1.80 $1.95 11/24/03 Drop #7 $2.19 $2.05 $2.02 12/22/03 Drop #8 $1.49 $1.53 $1.54 01/19/04 Drop #9 $1.31 $1.25 $1.12 02/23/04 Drop #10 $1.55 $1.65 $0.00 03/22/04 Drop #11 $1.53 $1.50 $2.04 04/19/04 Drop #12 $2.06 $2.00 $2.07 Total $1.53 $1.58 $1.61
Note the RPC by mailing at 100%. This figure is automatically adjusted every week depending on the percent complete for the individual drops. You can easily see how the expected RPC at 100% compares against the budget and against the previous year. Tracking your RPC is critical to knowing how your mailings are performing. Tracking against your budget is more important than tracking against the prior year. This is due to the fact that your RPC is likely to go down as you increase circulation from year-to-year. What’s more, Internet attrition will also cause your RPC to decline against the prior year.
- 12-Month Buyer File Count. Typically a catalog business will grow by the same percentage as the 12-month buyer file increases. For example, if your 12-month buyer file increases by 15% your revenue should increase by about the same percentage. (The reverse of this is also true.) When you focus on growing your 12-month buyer file, your business should also grow. The 12-month buyer counts need to be tracked on monthly and year-to-date basis. “Like” months need to be compared. For example, how many 12-month buyers do we have on the file at the end of any given month compared with the same month the prior year. Due to timing, the June count cannot be compared with the May or April buyer counts. June 2005 must be compared with June 2004. You should also establish a 12-month buyer count goal for the current year. This goal needs to “tie” with the order/revenue goal. A typical report for tracking 12-month buyer counts is as follows:
HOUSE FILE UPDATE COMPARSION
0-12 MONTH BUYERS
CHART "B" DOLLAR AMOUNT 08/15/01
$00.00 - $19.99 11,135 13,113 13,272 $20.00 - $39.99 23,356 26,124 24,636 SUBTOTAL: $00.00 - $39.99 34,491 39,237 37,908 $40.00 - $59.99 17,997 20,013 18,562 SUBTOTAL: $40.00 - $59.99 17,997 20,013 18,562 $60.00 - $79.99 13,503 15,111 14,123 $80.00 - $99.99 9,257 11,920 11,095 SUBTOTAL: $60.00 - $99.99 22,760 27,031 25,218 $100.00 - $149.99 17,698 19,678 19,159 $150.00 - $199.99 9,551 12,401 12,397 $200.00 - $249.99 7,129 8,039 8,271 $250.00 - $299.99 4,806 5,461 5,865 $300+ 14,250 16,685 19,021 SUBTOTAL: $100.00+ 53,434 62,264 64,713 SUBTOTAL: 0-12 MONTH 128,682 148,545 146,401 0-12 MONTH NO RENTS: 1,200 1,385 1,222 SUBTOTAL: NO RENTS 1,200 1,385 1,222 0-12 MONTH TOTAL: 129,882 149,930 147,623 PERCENT INCREASE: 0.0% 15.4% -1.5%
BREAKEVEN POINT BEP BEP DESCRIPTIONS 59.5% GM 55.0% GM Merchandise Returns Rate 2.65% 2.65% Gross Profit Ratio 59.50% 55.00% Selling Expenses: 1). Catalog Production $0.033 $0.033 2). Printing & Ink-Jet $0.082 $0.082 3). Paper $0.110 $0.110 4). Postage $0.258 $0.258 5). Rented Lists and Coops $0.110 $0.110 6). Merge-Purge $0.008 $0.008 7). Order Form $0.013 $0.013 Total Selling Expenses $0.614 $0.614 BREAKEVEN POINTS: Incremental BEP $1.080 $1.173
- Gross Margin Ratio. Obviously, this is a key financial KPI. Knowing how the gross margin ratio compares with plan is also important to the marketing and circulation folks because it is used to determine the breakeven point (BEP). If the margin increases above the planned ratio, it will have the affect of lowering the BEP. On the other hand, if the ratio is less than plan, our BEP will be higher. If we do not make the necessary adjustment we could continue to mail unprofitable names. The chart below shows how the BEP can and will be affected by varying the gross margin ratio.
- In our example above, the original gross margin ratio of 59.5% yielded an incremental breakeven point of $1.08 per catalog mailed. With a decrease in the gross margin ratio to 55.0% the breakeven point increased to $1.17 per book.
- Customer Returns Ratio. As with the gross margin ratio above, the BEP is also affected by any change in the customer returns ratio. This is another important KPI to monitor on a monthly basis. A return rate for a typical gift catalog is 6%. Any variance either direction from this ratio, for example, will affect your BEP.
- Average Order Size is another important KPI. Any change in the average order size, up or down, will result in more or less orders affecting operations. The average order size needs to be tracked so that adjustments to the weekly order line can be made since staffing and labor dollars are affected.
- Selling Expense to Sales Ratio is a critical ratio on the income statement. The zone for consumer selling expense to sales ratios is in the 25% to 30% range. For a business-to-business cataloger, the range is more like 18% to 20% of net revenue. As a company increases circulation to less productive names, i.e., prospects and older house file segments, this ratio will increase. This ratio is critical to profitability. If you over circulate catalogs, this ratio will increase and profits will decrease. This is one way catalog companies get into financial trouble.
- The number of repeat buyers is an important KPI. Your repeat buyers are what make you profitable. Therefore, be sure to focus your time and your marketing dollars testing how you can improve this key ratio. If you can benchmark your current rate of repeat buyers, and focus on turning one time buyers into two and more time customers, you will see a significant gain in results. Profitability will increase.
- Call response time should be tracked on a daily basis. The standard should be 80% of all calls should be answered within 20 seconds; the remaining 20% of the in-coming calls should be answered with 1.5 minutes. What is also critical is the ASA (Average Speed of Answer). The norm is around 30 seconds. If the ASA is 30 seconds, the abandon rate will be about 5%. Although you may have “music on hold” and remind customers of your daily specials, or your commitment to customer service, no one likes being put on hold before placing their order. If you often answer calls in 5 or more rings and/or have customers “hold” more than 60 seconds, you should be using an overflow call center service until you reach these goals. Customer satisfaction is key!
- In-Stock Position/Back order rate are critical to customer satisfaction and are therefore critical to your business. If you have 90% or more of your items in stock before your catalogs hit in-home, you will be in good shape when the orders start to come in. Then, your merchandising team can concentrate on chasing the winners as opposed to trying to fulfill initial orders. What’s more, your customer satisfaction rate will increase and so will your customer repeat factor.
There are many other KPI’s you can track. The ten that I have selected are for example only. You’ll want to select the ones which you feel are critical to your particular business, goals and objectives. Don’t try to pick too many. And, make certain the KPI’s you determine can be measured. Focus on the critical Key Performance Indicators and watch your business improve.