Gross Margin Return on Investment (GMROI)
Candlefocus EditorTo calculate GMROI, the sales price of the item is divided by the cost of the item and the result is multiplied by the gross margin. This result is then divided by the inventory investment. The equation for this calculation is (Sales Price – Cost Price) x Gross Margin/Inventory Investment.This calculation is useful to retailers in helping them evaluate their stock, as it gives them a holistic view of the net revenue they make from their entire inventory.
A higher GMROI is generally preferred as it indicates that a unit of inventory is producing a higher profit. It also can be customized to fit various criteria to suit the retailer’s needs. It can show substantial variance in GMROI based on factors such as market segmentation, the period of time, type of item, and other factors.
By taking into account the above factors, retailers are able to better optimize their inventory, revenue, and profits. By implementing GMROI into their operations, they can better eliminate items that are generating little to no returns and find items that may be potential hidden gems and can result in an increase in profitability. With GMROI, retailers are able to better control their bottom line and use the calculation to maximize their returns.