Expert Tips for Calculating the ROI of a Piloted Retail Innovation

When you test a retail innovation with a pilot program, you want to generate reliable data that indicates both your ROI dollars and the time it will take to achieve it. But what exactly should that data consist of? 

In the following, we’ll not only answer that question but also provide helpful insights to improve your process for ultimately reaching the ROI of a piloted store innovation. 

(This post is the third in a three-part series on conducting store pilots for retail innovations. For related insights, be sure to check out 4 Questions to Determine if Your Retail Innovation Is Pilot-Ready and The Right Way to Pilot Your Retail Innovation, Right from the Start.)

ROI Fundamentals: The 4 Key Data Points 

According to John Cloe, CEO at ProductivityONE, a consultancy firm specializing in retail optimization, “A true pilot involves applying formalized testing standards in which data is collected from test stores, which implement the innovation, and control stores, which do not.” (For details on how to select stores, see this blog post.)

When it comes to ultimately calculating the piloted innovation’s ROI, Cloe says the statistical concept of delta plays a critical role. Delta in this context refers to the difference in the performance of test stores and control stores. 

More specifically, store pilots are typically designed to find the delta for each of the following four performance categories: 

1. Sales 
2. Margin dollars and percentage
3. Labor
4. Shrink (or losses)

From there, an overall delta can be calculated and a statistically supported ROI can be determined. 

Let’s take a closer look at those four categories and also cover tips for generating an accurate ROI as efficiently as possible.

1. Sales: Be Extra-Thorough with Your Most Important Data Point

Has the innovation created a lift in sales? Gathering the data to answer that will typically be the primary driver for your ROI formula. Given the sales-focused nature of retail, that may not be surprising. But if you happen to be leading the pilot process, just make sure you understand the disproportionate weight that will likely be given to your sales findings.

“You may have reductions in labor costs or shrink,” says Cloe. “But if the results show the innovation has actually had a negative impact on sales, decision-makers aren’t really going to care. They’re going to say, ‘Wait a minute. We’re not giving up sales.’”

On the other hand, he adds that you also need to be prudent when identifying a possible sales increase. For example, if your test stores show an uptick of 3% after an innovation’s implementation, you can’t neglect to weigh that against the data from the year prior in both the test stores and control stores.

Pro Tip: Remind People to Be Ready with Sales Numbers

Although it’s true that your final sales numbers can’t be calculated until the pilot is completed, you still want to remind the responsible parties well ahead of time. “They should be cued up so that they’re ready when the time comes,” says Cloe. “You don’t want to delay the findings or scramble to compile such critical data.”

2. Margin Dollars and Percentage: Be Sure to Identify All the Relevant Criteria 

How much of every revenue dollar do you keep after paying for expenses related to the innovation? Your pilot data should include what the innovation’s effect is to your cost margin percentage. 

“At the very least, a retailer will want confirmation on whether or not they’re sustaining their cost margin percentage,” says Cloe.

Be aware that the process for calculating margin percentage will vary greatly depending on the nature of the innovation and the specific product (or products) being sold. For example, the margin percent could very well move if an innovation reinvigorates a store section and you’ve also incorporated more assortment. 

“Imagine an innovation intended to optimize sales for apples,” says Cloe. “Your margin percentage needs to account not only for the device in concept but also for what it does to your apple inventory.” (See also the related Pro Tip below on unit movement.)

Pro Tip: Incorporate Unit Movement

Cost margin percentage is a function of the cost of goods, explains Cloe. And if that’s moving in one direction or another, that should also be accounted for by considering unit movement. “This is a valuable measurement because it keeps margin percentage honest, so to speak. We know that if our pricing is too high or too low, we’ll see that reflected in the movement of units.”

3. Labor: Measure a Cross-Section of Real Workers

How does the innovation affect employee tasks? Depending on the nature of the innovation, this measurement may require calculating how much labor an innovation adds. For instance, something like a new bulk foods section will require added labor in the form of refilling bins, cleaning up spills, washing bins, and assisting customers.

Conversely, if the innovation replaces labor—or is intended to reduce it—then you need to measure the labor that is saved. A good example is a pusher tray system, which can potentially reduce the time it takes for associates to manually front-face items.

Cloe points out that measuring innovation-related labor should be a two-pronged approach that considers the following:

1. Skill. An employee’s ability to complete the task effectively, with few errors or retrials.
2. Effort. The degree of energy required to complete the task.

“This is precisely why you want to include the range of associates who will be engaging with the innovation, from new hires and part-time workers to seasoned full-time employees.”

Pro Tip: Gather Labor Data Mid-Pilot

Let’s say you’re conducting a 13-week pilot. Cloe recommends conducting time studies in both your test and control stores somewhere around the sixth, seventh, or eighth week. “You’re now past the acclimation period so your numbers should be valid. But you won’t risk holding up the pilot’s final results because you waited until the end.”

4. Shrink: Identify Effects to Loss Rates

How is the innovation affecting shrink? There are scenarios in which this question is central, like when a retailer pilots a new form of security display case. In other instances, shrink data may be considered less critical. That said, generally speaking, no ROI formulation would be complete without including it.

“Shrink analysis can often confirm the predictable, but there are also occasions when it shows surprises,” says Cloe.  

For example, if an innovation improves product merchandising and stock rotation for a perishable food category, then you may indeed see a reduction in shrink from spoilage. On the other hand, maybe your shrink data reveals that a given innovation somehow increases the chances of associates damaging products while stocking. 

Pro Tip: Look for a Possible Trend in Shrink During the Pilot

Although you can’t calculate the final shrink data until the end of the pilot, Cloe suggests keeping track of inventory cycles over the course of a pilot. “That way, you can see if there’s an evolving trend that’s quantifiable, and that can lead to a more accurate data point for shrink.”

“Stay Vigilant” Over the Course of the Pilot 

Although those performance categories may be conceptually straightforward, the process for calculating data for each has nuances that can be overlooked in the pursuit of cold, hard numbers.

That’s why Cloe says, “The last thing you want to do with a pilot is just sit back and say, ‘We’ll do the math to get the ROI when it’s over.’ You need to stay vigilant from start to finish because complacency can ultimately hurt the quality of your results.” 

It’s also important to present the ROI findings as soon as possible. “The longer you wait to present the results after the pilot is done,” cautions Cloe, “the more difficult it becomes for the retailer and the innovation supplier to agree on what should be done next.”

Choosing the Right Partners Helps

We’ve covered the fundamental elements involved in calculating the ROI of a piloted innovation. But it’s important to note that the process is often as much art as it is science, and past pilot experience can be crucial for reliable ROI calculations. That’s why leveraging support from experts like John Cloe can lead to a better quality pilot and a more accurate ROI calculation.

In addition, don’t underestimate the importance of the right supplier. The most effective do way more than just provide a product; they understand how to partner with retailers to help them innovate effectively for the long term.

Take Marmon Retail Solutions and its family of retail-focused brands as an example. We provide integrated retail products and services that enable your innovations to be more strategic, more cost-effective, and ultimately more successful.

Learn more about how these retail solutions can work for you.