About Gross Margin Return
Gross Margin Return is an important benchmark used to determine how successful or unsuccessful the practices of a particular business have been. Gross Margin Return compares the amount of gross margin earned against the amount and cost of the company's inventory. This is often referred to as Gross Margin Return on Investment or GMROI.
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Significance
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Businesses must make decisions regarding how much inventory they will stock and how much they will charge for the inventory. The price it costs to house and acquire the inventory versus how much the consumer will pay determines the "margin." A product with a low margin sells for close to the price it costs the business to acquire and maintain it. A product with a high margin sells for much more than the cost to acquire and manage it.
Considerations
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Gross Margin Return poses many challenges to a business. Because space is limited in any store, determining which products to sell and the margin goal can be difficult. High margin products may make the business more money, but high margin also generally means fewer sales. Low margin products usually achieve higher sales, but the profit for each sale will be much less. Finding a good balance is important in achieving profitability.
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Identification
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To identify or calculate a figure for Gross Margin Return, simply divide the gross margin of the inventory by the the average cost of the inventory. The higher the figure, the better the Gross Margin Return.
Warning
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Determining the right balance when pricing products can be tricky. Many outside factors can affect Gross Margin Return. For instance, general economic factors can have a major impact. If consumers are buying less, many retailers will try to attract buyers with lower prices. However, the lower prices also lower the profit margin of each sale, making it more difficult to achieve a high Gross Margin Return.
Effects
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Gross Margin Return helps a business determine if its current practices and strategies are working well. If the Gross Margin Return is less than 100 percent, the company is actually losing money on every sale. This often occurs when a company is excessively discounting products, has poor customer return policies, or is losing sales to competitors. If a company has a Gross Margin Return of less than 130 percent it may be time to rethink its current strategy.
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