Department Store KPIs (an analogy)
By Tim Wilson on in Metrics with One Comment
A couple of weeks ago, I had a conversation with the newest member of the analytics team at Resource Interactive, Matt Coen. I shared with him my “Measuring digital marketing is like measuring the Mississippi River” analogy, and he, in turn, shared with me his department store analogy. I’m a big fan of using stories and analogies to get across fundamental measurement concepts, so, with his permission, I’m passing along his perspective (and, of course, in the translation from a verbal story to the written word, I’m finding that I’m taking some liberties!).
The story is a great illustration of two things:
- How key performance indicators (KPIs) generally cannot live in isolation – driving a single KPI to a certain result is easy, but businesses operate on more than one dimension (for instance, total sales can be boosted by dropping the price well below cost…but that kills profitability)
- Why no company can have a single set of KPIs. The appropriate KPIs depend on what and who is being measured.
Onto the Story
Let’s take a fictional department store. At this store, each department has a department manager who is responsible for all aspects of the department, including the department’s P&L. In addition, all of the departments have a KPI regarding inventory turnover – if any product sits on the shelves for too long, the store loses money. All of the departments have this KPI because, overall, the store has an inventory turnover KPI.
The office supplies department manager is seeing his inventory turnover suffer, and, by digging into the data, he realizes that pens are killing him – no one is buying them, and it’s hurting his turnover rate.
He goes to the store manager and tells him, “I’m having trouble moving pens, and that’s hurting my inventory turnover rate. You may not be seeing it at the overall store level, but it’s got to be negatively impacting that KPI. I need to move pens to the checkout line display.”
The manager scratches his head and agrees to the change – inventory turnover is one of his KPIs, the department manager is being data driven, and he’s even come to the store manager with a proposed solution! Woo-hoo! He promptly instructs his team to remove the candy from the checkout lines and replace them with pens.
Sure enough, pen sales pick up, and the department manager is thrilled.
But, the candy department manager immediately shows up in the store manager’s office and tells him, “My sales are way below target. When I developed my forecast, it was with the assumption that candy would be at the checkout lines. It’s a major impulse buy and that’s where 25% of my department sales occur!”
The store manager really didn’t need this additional headache. He was already seeing a dip in the overall store margin, and he’d realized that he might have acted too hastily when responding to the office supplies department manager’s request, because, not only is candy much more of an impulse buy – so the increase in pen sales didn’t make up for the loss in candy sales – but candy is a higher margin product.
When the store manager agreed to the change, he was making a decision based on how it would impact someone else’s KPIs. And, he focused on a single KPI – inventory turnover – rather than complementary KPIs – inventory turnover and margin.
This analogy can be applied to any number of marketing scenarios. An easy one is a web site, where the owner of a niche site section makes a case for featuring that section very prominently on the home page (the department store checkout line display) in the interest of driving more traffic to his site.
It’s a useful tale!