Inventory how-to

How to calculate GMROI

GMROI (Gross Margin Return on Investment) tells you how much gross margin you earn for every dollar tied up in inventory.

Short answer: GMROI (Gross Margin Return on Investment) tells you how much gross margin you earn for every dollar tied up in inventory. The formula is gross margin divided by average inventory cost. A GMROI above 1 means your inventory is returning more than it cost you.

The formula

GMROI = Gross Margin ÷ Average Inventory Cost (at cost).

Gross margin is sales minus cost of goods sold, for the period you are measuring. Average inventory cost is your inventory value at cost, averaged over the same period (for example, average of beginning and ending inventory for the month).

Why it matters for small stores

GMROI shows which products are worth the cash and shelf space they take up. A product can have high sales and still tie up too much cash if it sits in stock a long time. Comparing GMROI across SKUs or categories tells you where to put reorder budget and where to cut back.

Common mistakes

Do not use retail price instead of cost when valuing inventory. Do not mix time periods, such as annual sales with a single month's inventory snapshot. Always match the period for gross margin and average inventory.

Step by step

  1. List sales and cost of goods sold for the period (month, quarter, or year).
  2. Calculate gross margin: sales minus cost of goods sold.
  3. Pull inventory value at cost for the start and end of the period.
  4. Average the two inventory values to get average inventory cost.
  5. Divide gross margin by average inventory cost to get GMROI.
  6. Repeat by SKU, category, or supplier to compare which inventory earns the best return.
  7. Track GMROI over time to spot products that are tying up cash without returning enough margin.

Worked example

A store sells a product line for $20,000 in a month, with cost of goods sold of $12,000. Gross margin is $20,000 - $12,000 = $8,000. Inventory at cost was $6,000 at the start of the month and $4,000 at the end, so average inventory cost is ($6,000 + $4,000) / 2 = $5,000. GMROI = $8,000 / $5,000 = 1.6, meaning every dollar tied up in that inventory returned $1.60 in gross margin.

How SteadyShelf helps

SteadyShelf does not calculate GMROI or track landed cost and margin by SKU, so you will need to pull sales, cost of goods sold, and inventory value from your store admin and accounting records to compute it manually. SteadyShelf's forecasts and reorder suggestions can help you avoid overstocking slow movers, which indirectly improves GMROI, but the metric itself has to be calculated outside the app.

$29/month flat, unlimited products and suppliers, 30-day free trial. Run the numbers now with the free reorder point calculator.

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

Related guides

All inventory how-to guides · Inventory glossary

FAQ

Can I calculate GMROI at retail price instead of cost?

No. GMROI measures return on the cash invested in inventory, which is the cost value, not what you plan to sell it for. Using retail price will overstate your inventory investment and give a misleading result.

What counts as a good GMROI?

This depends heavily on your product category, margins, and how your business runs, so there is no single number that fits all stores. A useful approach is to track your own GMROI over time and compare it across your own SKUs or categories rather than against an external benchmark.

Let SteadyShelf do this math for every SKU

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