# How to Value Your Shelf Space

Profitably operating a store involves juggling a lot of metrics which can quickly become overwhelming.  For brick-and-mortar stores, using metrics that are normalized to your physical space constraints can be a powerful way to simplify the number of metrics while retaining the crucial information you need to make informed decisions. Valuing your shelf space is important – it’s your most important asset!

It is relatively straightforward to value your space if you know some key metrics of your store. Start with your total sales, gross margins, and shrinkage along with the physical area of each department. With these simple metrics you can gain insight into how efficiently your store is operating, and in which areas there exist opportunities to drive growth.

## Determining what drives foot traffic

Foot traffic is top of mind to brick-and-mortar stores because it directly drives revenue. To learn which departments in your store most strongly contribute, simply divide the total sales of that department by the total linear feet of shelf space or square footage dedicated to that department:

\frac{revenue}{square\, footage}       OR          \frac{revenue}{linear\, foot}

This metric will quickly give you an idea of how much shelf space you should be dedicating to each department to optimally drive sales. Even if a department drives most of your sales in absolute numbers, if it takes up too much space in your store, you may not have enough discretionary items available to pad your margins, or you might lose out on more efficient revenue drivers.

Driving foot traffic and understanding where the bulk of your items are purchased is important for your baseline operations. It is also good, however, to know where you make your margin, and to invest resources into making sure that margin stays healthy. To identify your most efficient areas in your store, we recommend using the gross margin metric, either by linear feet or square feet. Divide your gross margin (revenue – COGS) by the linear or square dimensions of your shelving for the specific department.

\frac{gross\, margin}{square\, footage}       OR          \frac{gross\, margin}{linear\, foot},

This metric will quickly indicate whether you have too much space dedicated to low margin items intended to drive foot traffic. If you don’t have a healthy gross margin, then foot traffic may put you out of business faster than it will help you grow. If you need to dedicate certain amounts of shelf space to low margin departments to drive foot traffic, make sure you find your highest margin per area departments and consider investing more heavily in these as a balance.

## What you bring home

In addition to knowing your gross margins, it is also important to track shrinkage and returns by product category to have better insight into how products and departments contribute to your total margin. The last important metric we recommend knowing is your “net product” margin, which accounts for shrinkage and returns, since some products are more likely to be stolen or returned. This metric best reflects which areas of your store contribute the most to your net margin.

\frac{"net\,product \,margin"}{square\, footage}  OR  \frac{"net\,product\, margin"}{linear\, foot},

where “net product margin” = gross margin – shrinkage – returns.

This metric gives you a quick idea of whether seemingly-healthy store areas are plagued by shrinkage or returns. Use this metric to invest resources in areas that are underperforming, whether that be by selling too low volume or suffering from high return or shrinkage rates. In either case, you can consider dedicating personnel to these areas to help customers make more informed decisions and guide them to better purchasing decisions.

## How to use these numbers

These metrics can be useful for quickly diagnosing store-level problems and opportunities. For example, if you find that you have areas or departments in your store that perform poorly for total sales and margins per linear or square foot, then you may be overinvesting space in this area. Or, if you have areas that perform well for gross margin, but poorly for the “net product margin,” then you may need to up your loss prevention programs in this area or speak with customers about why they are returning so many products.

On the flip side, if you have departments that are driving large sales, test whether increasing the space dedicated to these areas improves sales even further. The increased foot traffic may lead to new customer acquisition or additional discretionary spending. If you have areas with large gross and net margins, dedicate more space to test whether more sales in this high margin area will improve your bottom line.

Knowing your store-level sales and margins is important, but to optimize your store further you need to understand how your most valuable asset, your physical space, is valued. Understanding your metrics on a spatial level allows you to build better planograms, improve your store layout to highlight your most important areas, and track product performance leading to better selection.

In addition to optimizing your store layout, understanding the value of your shelf space by linear or square feet opens opportunities to improve promotion fees and end cap programs. Traditionally, many fees are charged based on precedent, or numbers that “feel right.” Now, you can optimize fees by comparing to granular metrics, and operate programs that improve your margin while maximizing ROI for brands. If brands feel they are getting the best bang for their buck by working with you, they will continue to invest in their relationship with you. This can pay large dividends for your bottom line and your visibility as they promote their partnership with you.

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