Glossary - Products and inventory
GMROI
GMROI, gross margin return on inventory investment, measures how many dollars of gross margin a product earns for each dollar invested in the inventory behind it. It is calculated as gross margin for a period divided by average inventory value at cost. Ecommerce operators use it to judge whether a SKU deserves the capital it ties up.
| Variable | Definition |
|---|---|
| Gross margin | Revenue minus landed COGS for the period, in dollars. Landed means cost plus freight-in plus duty - the CM1 rung of the step-down. |
| Average inventory value at cost | The average value of on-hand stock across the same period, valued at landed cost, not retail price. |
GMROI factors into gross margin percent multiplied by the sales-to-stock ratio, so the same score can come from a thin margin turning fast or a fat margin sitting still.
Worked example
Every dollar tied up in this SKU's stock returned $1.60 of gross margin over the year. The same $48,000 of margin earned off $60,000 of average stock would score 0.80 - same product, same sales, twice the capital.
What is a good GMROI?
Above 1.0, a SKU earns more gross margin in a year than the average stock investment sitting behind it; below 1.0, the stock costs more than it earns at the gross margin line. But 1.0 is a floor, not a target, and the workable target depends on your margin structure: your gross margin percent, how fast the category naturally turns, your carrying cost and cost of capital, and how seasonal the range is. There is no honest universal benchmark. Compute your own floor instead: the GMROI at which a SKU covers its carrying cost and the return you need on the cash - anything below that is capital better spent on another SKU.
GMROI vs related metrics
| Metric | What it tells you | How it differs |
|---|---|---|
| Inventory turnover | How many times stock sells through in a period | Pure speed, blind to margin; GMROI is speed multiplied by margin |
| Sell-through rate | Share of received units sold in a window | Grades the quality of a buy; GMROI grades the return on the stock investment |
| Gross margin | What a sale keeps after landed COGS | Profitability of the sale alone, ignoring how much stock it took to make it |
| Contribution margin | What a sale keeps after all variable costs | Steps below gross margin; GMROI stops at the gross margin line |
Common mistakes
- Valuing inventory at retail instead of cost. Retail valuation shrinks the ratio and makes SKUs incomparable when markup varies across the range.
- Using a point-in-time inventory figure. A snapshot taken just after a big receipt halves the score; one taken just before doubles it. Average the stock position across the period.
- Using supplier invoice cost instead of landed COGS. Freight-in and duty vanish, gross margin inflates, and every SKU looks better than it is.
- Comparing different period lengths. A 6-month GMROI is not comparable to a 12-month one. Annualise before ranking.
- Stopping at gross margin. GMROI says nothing about fulfilment, returns or marketing cost. A high-GMROI SKU can still lose money once the full step-down runs.
FAQ
It means the SKU earned more gross margin over the period than the average stock investment behind it, which is the minimum bar rather than a target. Carrying cost, cost of capital and every cost below gross margin still need covering.
Turnover measures how fast stock sells through; GMROI measures how much gross margin the stock earns per dollar invested. GMROI is gross margin percent multiplied by the sales-to-stock ratio, so it rewards fast turns and fat margins together.
Yes. Freight-in and duty are real product cost, so leaving them out inflates gross margin and flatters every SKU's GMROI. Compute the gross margin input as revenue minus landed COGS, consistent with the CM1 step-down.
Updated July 2026