Measuring the market

Reading it wrong, leads to flaws in marketing and operational strategies – one reason why so many enterprises trail a blaze initially only to lose steam, caving in to competition

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How do retail brands measure their performance in Pakistan and how accurate is it? More often than not, the sole parameter used in this country is ‘sales,’ with only a precious few doing the extra bit by measuring outlet footfall. Curiously, neither of these accurately represent performance. Is that why many businesses trailing a blaze initially lose steam, caving in to competition, because of flaws in marketing and operational strategies.

Around the world, retailers employ several metrics with varying accuracies – including the number of customers visiting an outlet, average time spent at the outlet,  customer satisfaction, dropout and retention rates, and product line sold mapped against customer demographics.

“In this country, the overwhelming weightage is given to sales – without regard for merchandize, marketing, or retail performance. This often leads to inaccurate performance measurements, invariably leading to less than appropriate future strategies by businesses,” said Footmetrics CEO, Ahmed Muzzamil.

Subsidiary of Mezino, a decade-old services company mostly catering to clients in the UK and the US, Footmetrics works as a customer experience-enhancing system. “We connect ourselves with multiple input streams, and then collect data from different systems. On top of that, we also do intelligent design and then make decisions based on that data.”

“We have different kinds of devices that we install at different shops and all those devices provide data to our centralized station – telling us how many people are walking into a store, how much time do they spend inside, the frequency and demographic of the customers, and the choice of products,” said Ahmed.

Sales, the sole criterion:

Drawing comparisons with the world, Ahmed said, “We see that there is a big gap in Pakistan retail sector. There are a couple of things that are not happening here, and compared to the retail business in the US and the west we are far behind in being appropriately equipped, with the technology setup and technical expertise. We do not have the data that drives retail across the world, with ‘sales’ being the only measure to gauge success.” To Ahmed, this is incapacitating our retail to operate at par with international brands.

The story doesn’t end there. To Ahmed, while sales might not suffice for assessing performance, actually any metric boiling down to mere number-crunching falls short of the purpose. The Harvard Business Review warns against putting too much faith in numbers while appraising performance. “Good or bad, the metrics in performance assessment package all come as numbers. The problem is that numbers-driven managers often end up producing reams of low-quality data.”

This hints at irrespective of which method is used, it might not be the best answer to measuring actual performance. Let’s go over some of these criteria with a fine-toothed comb.

Sales: Volume and Value

The pros of this approach allow for a detailed evaluation of market trends – in growth or decline. Easy to measure, it also sheds light on competition through changes in prices and outlines the geographically better placed outlets of a brand, allowing for improved workforce distribution amongst outlets.

A major flaw with this approach, however, is that it might mislead a single brand’s falling or rising sales into making them believe that the entire market is moving in the same direction. Changes in sales figures do not show the consistency or sustainability of the business either. Rising sales might lead the brand to expansion plans, only to fall back into losses. Over expansion is one of the top seven reasons that lead to businesses declaring bankruptcy right after they start expansions. Sales figures, if higher than a business’s current production, can also lead them into thinking that their success is linked to how fast they can expand. Expansion is a decision that needs to be arrived at after carefully considering what needs to be added into the business, and higher sales of any particular product can end up leading the business into making wrong decisions.

Another problem with sales measurement driving a business’s decision is the price fluctuations. The local retail industry screams of this effect, whereby the discounts trend leads to higher sales, eventually whittling down prices across the board, thus squeezing profit margins while alienating customers unless there is a special sale or discount.

If measured in terms of year-on-year numeric, this measure goes further down on the scale of unreliability because of its year-long time lag. And it does not account for potential future inflation changes, behavioral shifts in customers, and does not account for any of the external factors such as competition, taxes or obsoleteness of the products. Linking back to expansion, sales metric alone is not enough to measure performance of any retail business. Pakistan’s retail industry is a clear example of that, where brands like Khaadi and Nishat kept expanding as they saw their sales rise, and when the market trends changed with sales culture becoming the new norm, their profitability went southwards sharply.

Various parameters:

While these measures somewhat offset the blanket measurement of sales by taking averages of different costs incurred to the revenues earned, the overall results still remain less than trustworthy. According to Zodiac – a predictive customer analytics platform, these metrics lack visibility, are highly erratic and channel specific, and are backwards-looking.

Furthermore, none of these metrics sheds light on demography of the customers, trends over time, or the success of brand’s marketing campaigns. The past performance – as denoted by backward-looking – also falls short of predicting future trends of the business and the market.

While sales per employee metric is on the cost side and can help the brands identify the productivity and efficiency of their resources, the fault with this metric lies in the possibility of corrective action. Since this method takes an average of the performance of a brand over its entire workforce, it is impossible to find out the individual resources’ productivity.

This method is also only applicable for sales representative, whereby the effects of marketing or brand image building are not the primary concern. For an average retail outlet, this might not be the most optimum measure of performance.

Footfall:

Number of customers visiting a shop is probably the most apparent measure of a brand’s marketing success. The higher the number of customers, the higher the chance of more purchases being made. This method also allows for measuring traffic by the hour, day of the week, store location, seasonal periods, and promotion periods.

However, the problem here is twofold. Firstly, the measurement metric itself is dubious. Ahmed explained that his technological equipment tells him how many people are passing through the sensors and entering the shops. Sefam Senior General Manager Omer Chaudhry casts doubt on this method saying. “The mere measurement of people entering a shop cannot give an accurate representation because you have to discount the employees of the shop as well. The number of employees and then how many times they move in or out of the shop is impossible to determine with accuracy which can compromise on this measure.”

Secondly, footfall is not a measure of actual conversion rate. The interpretation of this number also doesn’t tell much as it is as likely for a customer to make a purchase as it is for him to visit the shop without spending a single rupee. It is also possible for a very high number of customers making only small purchases, for example socks or belts in a garment shop, which probably would not even suffice for the operational costs of the business.

Another problem with footfall metric is related to the rising trend of e-commerce. The store numbers do next to nothing to account for the online sales. If in loose terms, visits per site are taken as the virtual footfall, all shortcomings of the metric in a brick and mortar outlet apply to online visitors checking the store’s website.

Conversion rates:

Conversion rate is a step up on footfall as it measure the number of actual customers to the number of visitors. This metric is calculated by dividing the number of customers making purchases by the number of customers entering the shops. This method can also provide the brand management with an idea of the effectiveness of their staff, if the business is such that the staffers are responsible for aiding the customers into making a purchase, for instance in an electronics shop or a car showroom.

However, the fault with this criterion steps from the average calculations. It is especially difficult for brands that are expensive; since it is quite possible that one or two customers, possibly belonging to a specific socio-economic bracket, make large purchases while a large number of people only check the price tags. As a result, the conversion rate fails to provide any details about the demography of the actual customers and can lead to faulty marketing campaigns or selling incentives that end up harming the brand more than helping it. Conversion rates also fail to account product returns and can end up skewing the results of actual sales as opposed to momentary sales.

As far as number of items purchased per person is concerned, it might mislead in terms of value. If every customer is purchasing a higher number of products than before, it is quite likely that they are buying on the cheap. This is especially true with discounts and sales offers. As a result, the metric will show growth while the value and the profits will be declining all the same.

The average time spent in the shop might also be misleading. Longer time spent in the shop could be an indicator of customers’ interest in the brand, but it could also be the result of the workforce’s inability to help and guide the customers quickly.

Brand awareness, customer satisfaction

How these metrics are measured in the first place? There are surveys handed over at the time of purchase or questionnaires circulated online or in real time among the customers to fill out. The most frequent questions: the level of satisfaction from the product or service and the likelihood of the customers recommending the brand to others.

With both these methods it is often pertinent to protect the privacy of the customer, which means that they cannot be asked personal questions like income level and age group etc. If asked, these questions can themselves become the discouraging factor for them to fill out these forms. This means that despite collecting data on customer satisfaction, there is no way to determine with certainty the gender, age or socio-economic standing of the most or least satisfied customers. The recommendation metric also only becomes useful when the sales of the product depend on recommendations or word of mouth. For most retail brands, that is not the case.

Also customers’ propensity to let their purchase decisions being influenced by others’ opinions differ for every industry. While they might come in handy in terms of medical treatments, it might not affect clothing choices much.

Now let’s move to the financial formulae used to measure performance. Return on Investment, Inventory turnover, Earnings per share, and gross profit at the very start are frequent indicators used to explain a company’s performance.

Gross Profit/Net Profit:

This is the easiest and holy grail of the performance of a company, albeit not without its own faults. Whereas gross profits only provide an estimation of the mark up success of the difference between the direct cost of raw materials and their selling price, it completely misses out on the overall expenses incurred by the business’s operations leading up to its profitability and hence sustainability.

The problem with net profit is that by the laws of accounting it is not inclusive of any investments or divestures made by the company. As a result, this metric is purely periodic and tells nothing about the fluctuations in the past or possibilities of changes in the future. It also doesn’t shed light on the changing market trends, rising competition, competitiveness of the company’s products or the success of its marketing campaigns. A positive number at the end of the profit and loss account can only tell so much about a company’s performance.

Earnings per share, dividends:

‘Earnings per share’ is frequently quoted as a trusted figure for company’s financial and operational strength, but the backward-looking problem continues to manifest itself with this metric as well. The actual impact of this ratio comes in form of dividends which can be misleading as well. If the profits made are distributed among the shareholders too frequently, it might not bid well since it is a clear indication that the profits are not being reinvested in the company which will mean no expansion and therefore possible loss on the market share. If, however, the dividends are not being paid at all, the future of the company then banks on the success or failure of the new investments being made by the company. In either case, EPS alone is not enough to show sustainability of the business.

Return on investment:

An article published in Forbes Magazine shed more light on this matter. “ROI’s roots are in evaluating one-time capital projects. “But is marketing a one-time capital project?” said the article. The fact remains in the details of the statistics used for this ratio. While marketing expenditure is sometimes counted as an investment, in real terms it remains an expense. In a layman’s terms marketing cost is part of the continued expenses a business incurs while investment is one time expansionary spending.

“Plain ROI is certainly an important metric for managers. But it falls well short of helping us understand marketing’s contribution to business goals, or how those contributions can be improved. ROI is too limited. To gauge and improve marketing effectiveness, for example, we must factor in the strategic intent of all marketing investments a company makes.”

This method can also lead to false conclusions when this ratio is continuously being used to measure performance. For example a marketing campaign might prove successful but shows results in terms of purchases with a time lag. This is true for products that can cause customers to save money or wait for the pay-day to make a purchase. However if the ROI on a marketing campaign shows unfavorable results, it might be scratched off and replaced with another marketing campaign which ends up being less successful. Furthermore, an improvement in ROI is not an indicator of overall improved performance if the other marketing goals are not being achieved, such as product positioning or target customer attraction.

Inventory turnover:

Cash is the most important asset for any business and inventories are the biggest blockage of cash, especially for a product heavy business. This ratio is calculated by dividing the value of sales by the average inventory value. While this may allow for a balanced inventory to sales volume, this ratio seriously undermines the trends in the market and can lead to too much or too little inventory for a retail business. Even if calculated per product – which makes it several times more cumbersome – this ratio fails to project future demands and can fall victim to seasonal changes in the market.

In his book, “The End of Accounting and the Path Forward for Investors and Managers” Baruch Lev goes on length to point out flaws in the current financial statements and metrics of performance.

“Financial reports as an historical document will always be important… I don’t completely disregard it. But it doesn’t give you linear information about what will happen in the future.” The problem therefore with all these financial ratios ends up being them all focused on past performance and failing to provide any insight into the future strategies.

What to do then?

It is fairly clear that none of the common metrics provide an all-encompassing measure of business performance, rather they are all interdependent and a mix of measures suited to the individual needs of a business need to be accounted for. However, the idea that all these measures are important is equally ridiculous. Credit Suisse Managing Director and Head of Global Financial Strategies Michael J. Mauboussin might have a solution after all.

In his article, ‘The True Measure of Success’ he says that defining your governing objective, develop a theory of cause and effect to assess presumed drivers of the objective, and then evaluating your statistics based on that objective is the only way forward. To add to this, in layman’s terms, the performance metrics used by any company should be real-time, accounting for the changes in market trends as well as forward looking. One size fits all criteria is not going to work, especially in a country like Pakistan where industry is volatile and uncertainty rules everything.

At the end of the day, it depends upon the company management to evaluate the mix of different metrics to be used to evaluate their performance. A single objective or subjective factor has no hope of driving any business towards successful planning and marketing.