Effect of Traffic on Sales and Conversion Rates of Retail Stores

It is found that store sales volume exhibits diminishing returns to scale with respect to traffic, and labor moderates the impact of traffic on sales, which underscores the importance of in-store operations in driving the financial performance of retailers.

Abstract

Attracting shoppers to stores and converting the incoming traffic into sales profitably are vital for the financial health of retailers. In this paper, we use proprietary data pertaining to an apparel retailer to study the relationship between store traffic, labor, and sales performance. We decompose sales volume into conversion rate (defined as the ratio of number of transactions to traffic) and basket value (defined as the ratio of sales volume to number of transactions) and analyze the impact of traffic on sales and its components. We find that store sales volume exhibits diminishing returns to scale with respect to traffic, and labor moderates the impact of traffic on sales. For example, we find that for values of traffic and labor corresponding to the mean, increasing average traffic per hour by one unit increases average sales volume per hour by $9.97. Further, we find that the marginal returns to traffic increases from $10.00 to $11.32 when labor increases by one standard deviation. In addition, we find that the conversion rate declines with increasing traffic and a lower conversion rate is associated with a decrease in future traffic growth. Our study underscores the importance of in-store operations in driving the financial performance of retailers.