When opening up a small business or evaluating how well a small business is doing in a specific location, one of the first hurdles you are going to come across is determining whether or not the space you are in provides enough selling value. You may base this value on industry estimates, similar or past locations, the amount of storage space you’re getting, or the contract deal you signed. Yet, there is another, more important factor that determines the value of your retail space. It’s called “sales per square foot” and it tells you the generated revenue you receive per square foot of retail space. Let’s go over why this formula is important, what it can tell you, and how you can apply it to your small business.
What Is Sales Per Square Foot & Why Is It Important?
The “sales per square foot” metric can be used to determine the amount of revenue you are generating per square foot of retail space. This is one of the best metrics you can use to gauge the performance of your retail store, as it tells you how efficient you are with the space and can give you insights into how you can improve the store layout, the merchandising, and staff performance.
The higher the sales per square foot, the stronger the performance of the store is. For example, a small business retail store that is generating $100/square foot is doing better than one that is generating $50/square foot. To give you an example of a large business, the number 1 retailer that generates the most profit per square foot is Apple, pulling off a staggering $5,546/square foot . This makes a lot of sense since they sell large ticket items like Macbook Pros, Macbook Airs, iPhones, and iPads. On the other hand, Tiffany & Co, a jewelry company, is number 3. which sells at $2,951/square foot.
What Is the Formula for Calculating Sales/Square Foot?
To calculate your total sales per square foot, you are going to need to take your total revenues from those sales and divide it by the retail space. Take the average square feet of the retail space and if you have more than 1 store, don’t forget to multiply.
- Revenues being the amount of sales generated over a defined period of time.
- Retail space being the amount of space used to sell items.
Here is how it works. Imagine your company generated $1,000,000 in 1 retail shop with an average square footage of 2,000sq/ft. The formula would go like this: $1,000,000 / (2,000 X 1) = $500/square foot.
How Can I Apply This to My Small Business?
You can apply this to your small business by using the formula to learn how to maximize your sales/square foot. The best ways to improve your sales/square foot is by doing the following.
- Improve the layout of your store by decluttering space, removing unnecessary assets, and utilizing the space better by adding in signage, better lighting, and placing the best products in areas of high traffic where people will look at them and purchase them.
- Make sure that your product inventory is full of items that are hot sellers and trending. Gather data about what customers are buying from you, when they are buying these particular items, and how they are purchasing them.
- If you are not a retail store that sells high ticket items, you can still achieve a relatively high sales/square foot by cross-selling, and upselling. Pair items together that complement one another, and upsell without being pushy.
Buy items in bulk at wholesale prices to help keep cost overheads down while maximizing how much you profit/item sold. Depending on your industry niche, you can buy electronic accessories, clothing, and other items at wholesale pricing.
- Finally, make sure you set up a loyalty program that encourages customers to keep coming back to your store. The easiest one to implement is a points per purchase, but there are also membership programs (think Amazon Prime), or tiered format programs.
Beyond this, make sure to invest in your employees by training them properly in cross-selling, up-selling, product knowledge and overall customer service skills.