Data Driven Decision Making is Fundamental
Data driven decision making is a trendy thing to talk about these days. In reality, all executives are using some sort of data to make decisions. The real opportunity is to become more rigorous and reframe how we use data. At the basic level, every business decision should 1) have an expected outcome and 2) be measured against previous strategies to ensure that the business is moving in the right direction.
A Data Driven Approach is Econ 101
There is greater need for rigor in today’s retail environment than ever before. Taking a data-driven approach relates back to a simple concept that most of us learned in basic economics – marginal analysis. Most executives and investors look at business performance in total to get an overall picture of a company’s value and future prospects. However, when trying to use data as a predictive indication of businesses direction, evaluating the returns of the last dollar spent is a better approach. For physical retailers, it is essential to assess the performance of each new store versus previous stores on the basis of productivity, operating performance and investment returns. Furthermore, retailers should drill down on each metric to uncover real drivers of performance. This analysis should be repeated for every new strategy implemented.
Reckless Growth Is Behind Retail’s Downfall
Retail is a tricky business in which it is easy to ‘manufacture’ growth, until it’s not. Many retailers open stores simply to increase sales without a clear eye on what new store performance is indicating about business health. The current slate of bankruptcies and store closures would suggest that many retailers have opened stores carelessly. But how do you know when to give the green light on store openings?
Hurdle Rate Should Not Be the Litmus Test for Retail Expansion
Many retailers will open a proposed store as long as the expected return is above the company hurdle rate and the store is expected to quickly payback the initial investment. This bar is way too low. Simply looking at performance above a hurdle rate does not capture business momentum. The comparison of performance to previous classes of stores with an eye on changes in productivity and returns of new stores is key to understanding where a business is in its life cycle and if adjustments need to be made.
Constant Improvement Is Critical to Success
Too many retailers seek to repeat the performance of existing stores in new stores without asking – ‘how can we do better’? This approach is the equivalent of ‘if it ain’t, broke, don’t fix it’. When new store performance begins to deteriorate, these companies either begin to think of new strategies or worse, justify that performance is still pretty good. High performing businesses look to improve on core metrics, including the productivity and returns of new stores, every year. With every decision, whether it is about the store format, marketing, service, or assortment, retailers focused on constant improvement assess whether these strategies are pushing performance forward. They start with a hypothesis that by tweaking the strategy, performance will improve. Then they measure the results and set a new hypothesis about the next move.
Let’s continue the conversation. Please subscribe to receive future blog posts and contact firstname.lastname@example.org if you’d like to learn more about how Pro4ma can help your company forecast more efficiently.