A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage.

The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company.

The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations.

Gross Margin: The Concept

Cost of Goods Sold:

COGS = Billed cost + Inward transportation charges + Workroom costs – Cash Discount

Gross margin is the value of sales less the cost of goods sold.

Increasing gross margin entails increasing sales revenue or reducing the cost of the merchandise.

The obvious way to increase sales revenue is simply to increase prices.

Unfortunately in a competitive environment things are not that easy.

The recommended approach is to avoid products that are known value items or those that your competitors focus on for price comparisons.

Merchandise managers who can effectively inter-relate gross merchandise management and inventory turnover management will be able to achieve high performance results.

Gross Margin: The Concept

Gross Margin: The Concept

Gross income divided by net sales, expressed as a percentage.

Gross margins reveal how much a company earns taking into consideration the costs that it incurs for producing its products and/or services.

Gross margin is a good indication of how profitable a company is at the most fundamental level.

Companies with higher gross margins will have more money left over to spend on other business operations, such as research and development or marketing.

This number represents the proportion of each dollar of revenue that the company retains as gross profit.

For example, if a company's gross margin for the most recent quarter was 35%, it would retain $0.35 from each dollar of revenue generated, to be put towards paying off selling, general and administrative expenses, interest expenses and distributions to shareholders.

The levels of gross margin can vary drastically from one industry to another depending on the business.

For example, software companies will generally have a much higher gross margin than a manufacturing firm.

Gross Margin: The Concept

Many retailers use the performance indicators of gross margin % (after markdown) and weeks cover to measure performance.

While the Gross margin% is a measure of relative profitability without taking into account the cost of stockholding investment, week’s cover tells us how effectively the stock turned, without informing us about relative profitability.

What is needed is a measure that combines these two indicators into an indicator of real profitability.

GMROI does this. GMROI is calculated as Gross Margin / Average Inventory at cost

Gross Margin Return on Investment

Average Inventory Cost

The average is found by adding the beginning cost inventory for each month plus the ending cost inventory for the last month in the period. If calculating for a season, divide by 7. If calculating for a year, divide by 13.

Examples: For a 6-month season: Inventory at cost in Jan $52,000, Feb $35,000, March $48,000, April $65,000, May $35,000 and June $60,000 (52,000 + 35,000 + 48,000 + 65,000 + 35,000 + 60,000) ÷ 7 = $42,142.86

GMROI is a merchandise planning and decision making tool that assists the buyer in identifying and evaluating whether an adequate gross margin is being earned by the products purchased, compared to the investment in inventory required to generate the gross margin.

It focuses the buyer’s attention on the return on investment rather than on sales as a basis for merchandising decisions.

The focus is on SKUs (stock keeping units) of each individual product rather than department totals and it helps to identify product winners’ and core products.

Product winners are those products that perform well, which boost profitability and are the best return on investment products.

Core products on the other hand, are the buyer’s list of existing winners that can never be out of stock. They’re the most valuable products in terms of their high profitability and their excellent return on investment.

Gross Margin Return on Investment

Why is it important ??? Operational cost reductions alone are not sufficient

in today’s business climate to achieve profit objectives; an integrated approach is required.

Companies managing their gross margin will successfully deliver sales growth, improve customer satisfaction, remove internal barriers that separate departments and disciplines, and increase bottom-line results and shareholder value. 

The four key gross margin drivers are:

Pre-requisites of GM implementation Each of these key drivers of gross margin must have

concrete, margin-related objectives, concise, margin-related measurements, and clear ownership in the organization. 

All of these drivers have a substantial process element, which requires a strong cross-functional team effort to achieve successful implementation and continuous improvement.

 Maximizing gross margins requires focus on the right drivers and alignment of these objectives from the senior management team to the front-line people closest to the action. 

The interdependencies of the drivers: The synergy from understanding the interdependence of the

key gross margin drivers produces results that are greater than the simple sum of the parts.

Operational performance improvements enhance sales effectiveness.

Product management drives improved operational costs and improved sales.

A gross margin-focused sales force improves operational costs, the pricing process, and product management.

Additionally correct pricing strategies and processes benefit product management, sales effectiveness, and operational performance.