Retail Definitions:

While many important retail KPIs are measured in percentages, GMROI tells you how many actual dollars of gross margin are returned for every dollar you invested. In short, GMROI tells us how many dollars we got back for every dollar we spent on the goods we sold. Essentially, it is a measurement of turnover as it relates to your total sales. 

As with most KPIs, measuring the performance of GMROI across your entire store won’t provide much insight into planning future inventory purchases. However, analyzing GMROI across each classification in your store or measuring it across vendors can help you make informed decisions when turning over your goods. 

What is the “right” GMROI?

It usually takes a GMROI of at least 2 to survive. If you spend $1 on merchandise, you need to get at least $2 back (that's a GMROI of 2) to pay to run the business. If you want to do more than survive, your GMROI should be higher… the higher the better!

How is GMROI calculated?

Let's focus on the "Gross Margin" part first. To get this, you subtract Cost of Goods Sold (the amount you spent to sell the goods that sold) from revenue. This is your margin. The "Return on Investment" part is the ratio between your margin and how much you spent on inventory.

For example:

• In a given year, you buy 1,500 pens for $1.25 each.

• You sell 900 of those pens at $3.00 per pen, generating $2,700 in net revenue.

• Those 900 pens cost you $1,125, so you have a gross profit of $1,575.

• Your average cost of inventory for the year is $300

• Your GMROI is $1,575 / $300 = 5.25

So, you know that for every dollar you invested, you generated $5.25 in profit. If you lower the price of your pens, your GMROI goes down. However, if you raise the price and sell fewer pens, your GMROI also goes down. Your profit and average on-hand inventory will determine the efficiency of your inventory investment. The formula for GMROI looks simple, but there's a lot baked into it.