Measuring Quality of Sales, Not Just Quantity

Last Updated Aug 27, 2007 2:14 PM EDT

Metrics for Quantity And Quality of SalesWhen Bed Bath & Beyond announced that it had missed its earnings target by one penny in late June, the company's stock price fell 450 pennies. Why? As Eddy Elfenbein explained on SeekingAlpha.com, investors were surprised. Bed, Bath and Beyond always makes its targets.

In an interesting column which ran in the Wall Street Journal over the weekend and which appears on MarketWatch.com today, Herb Greenburg argues that they shouldn't have been. Though investors tend to focus on the quantity of sales as expressed in the same store sales numbers -- the metric which tracks sales in stores open at least one year-- there are other variables they should bear in mind, and which can be early indicators of trouble in a company. Greenburg spoke to Rob Wilson, president of Tiburon Research Group, who explained:

"There are many variables that can drive sales," Wilson says. One place those variables can show up early is in falling gross margins. One of the most obvious examples is markdowns, or sales, which can drive traffic to stores and boost revenue, but cut into profitability. "Very few people focus on the quality of sales," he says.
The quality of sales at Bed Bath & Beyond had been declining all year. The lesson for managers is clear. When monitoring how your product is selling, don't ask exclusively about how much you've moved, but also about the quality of those sales -- how profitable they were for your company. If quality of sales is declining this may be an early sign of stress and may indicate that a rethink of your expectations, your product, or its marketing, is in order.

(Image of discount sign by Maulleigh, CC 2.0)

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    Jessica lives in London where she works as a freelance writer with interests in green business and tech, management, and marketing.