Inventory glossary

What is Gross margin return on inventory?

Gross margin return on inventory (GMROI) is a ratio that shows how much gross profit a store earns for every dollar it has tied up in inventory.

GMROI tells you which products are worth the shelf space and cash they use. A candle that sells slowly but carries a high margin can still beat a fast-selling candle with thin margins, and GMROI is how you spot that.

Use it to compare products or categories, not just total sales. If a SKU has low GMROI, either raise its price, cut the cost you pay for it, or stop reordering as much of it.

Formula

GMROI = Gross margin / Average inventory cost

Example

A candle store sells one scent for $6,000 in a year with a gross margin of $3,600. The average inventory cost for that scent during the year was $1,200. GMROI = 3600 / 1200 = 3. For every $1 held in inventory, the store earned $3 in gross margin.

Common mistakes

  • Using retail value of inventory instead of cost, which understates GMROI.
  • Comparing GMROI across very different product types without context, like comparing a fast fashion item to a durable good.
  • Calculating it once a year instead of tracking it regularly to catch slow shifts early.

Gross margin return on inventory and SteadyShelf

SteadyShelf does not calculate GMROI, but its sales forecasts per variant can help you spot which SKUs to reorder in smaller quantities if their margin return is weak.

SteadyShelf is launching on the Shopify App Store. Join early access to get the install link first.

Related terms

Gross margin · Inventory turnover · Carrying cost · Sell-through rate · SKU rationalization

Full inventory glossary

FAQ

Is a higher GMROI always better?

Generally yes, since it means each dollar in inventory returns more profit. But a very high GMROI can also mean you are understocked and missing sales, so check it alongside stockout rates.

What counts as a good GMROI?

There is no universal number since it depends on your margins and industry. A common rule of thumb is that a GMROI above 2 means inventory is pulling its weight, but you should compare it against your own store's past performance.

Let SteadyShelf do this math for every SKU

Order-by dates per supplier, seasonal forecasts and draft POs for your Shopify store. $29/month after a 30-day free trial.

Get early access