Analysing Gross Margin Return on Inventory Investment (GMROI): A Practical Guide for Sellers

Is Your Inventory Paying You Back?

Every product sitting in your storeroom or warehouse is more than just a box—it’s capital. And the longer it sits, the more it costs you. You’ve already spent money to stock it. The real question is: Is it making you enough money back? That’s where GMROI, or Gross Margin Return on Inventory Investment, becomes your go-to performance metric.

GMROI doesn’t just show how much you’re selling—it tells you how much gross margin you’re generating for every pound invested in inventory. It’s a strong lens that shows you which items are profitable, which ones cost too much, and how well you’re using your inventory budget.

No matter if you run a retail shop, manage an online store, or oversee a product-based business, knowing your GMROI is key. It helps you avoid overstocking low-margin items. Instead, you can focus on inventory that brings better returns. In this guide, we’ll explain GMROI calculation. We’ll also show you how to understand the results. Finally, we’ll discuss using this insight to boost your stock strategy and profits.

Ready to make your inventory work harder—and smarter—for your business? Let’s dive in.

What is GMROI?

Definition

GMROI (Gross Margin Return on Inventory Investment) shows how much gross profit you make for each pound spent on inventory.

GMROI Formula

The most common formula is:

GMROI = Gross Margin / Average Inventory Cost

Where:

• Gross Margin = Sales Revenue – Cost of Goods Sold (COGS)
• Average Inventory Cost = (Beginning Inventory + Ending Inventory) / 2

A GMROI greater than 1.0 means you’re selling inventory for more than it costs you to hold it — a good sign!

Why GMROI Is Crucial for Inventory Management

1. Helps Prioritise Products

Use GMROI to identify top-performing items. If a product has a high GMROI, it deserves a prime spot.

2. Optimises Inventory Spending

GMROI shows which categories are worth restocking and which ones are dragging down your profits.

3. Supports Smarter Pricing Decisions

Low GMROI? You might be underpricing products or over-discounting.

4. Boosts Strategic Buying

Knowing your GMROI helps you negotiate better with suppliers and avoid over-ordering.

Want to pair this with turnover insights? Learn how to Calculate Your Inventory Turnover Ratio for a fuller performance picture.

How to Calculate GMROI

1: Get the Numbers

• Sales revenue for the period
• Cost of goods sold (COGS)
• Beginning and ending inventory values

2: Calculate Gross Margin

Gross Margin = Sales Revenue – COGS

3: Calculate Average Inventory

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

4: Plug Into the Formula

GMROI = Gross Margin / Average Inventory Cost

Example:

• Sales Revenue = £400,000
• COGS = £260,000
• Beginning Inventory = £80,000
• Ending Inventory = £100,000

Gross Margin = £400,000 – £260,000 = £140,000 Average Inventory = (£80,000 + £100,000) / 2 = £90,000 GMROI = £140,000 / £90,000 = 1.56

For every £1 invested in inventory, you’re earning £1.56 in gross profit.

What Is a Good GMROI?

It depends on your:

• Industry: Grocery has lower margins; luxury fashion might aim for 2.0 or higher.
• Product Type: Fast-moving, low-margin products vs. slow-moving, high-margin goods.

General Benchmarks:

• Grocery: 1.5–2.0
• Clothing & Apparel: 2.0–3.0
• Consumer Electronics: 1.3–1.8

Aim for GMROI > 1.0 at minimum. Below that? You’re losing money on stock.

GMROI vs. Inventory Turnover vs. DSI

These three metrics work together:

• Inventory Turnover tells you how often inventory is sold
• DSI tells you how many days it takes to sell inventory
• GMROI tells you how profitable your inventory is

Read our full article on Understanding Days Sales of Inventory (DSI) to explore this metric in depth.

Case Study: Max’s Furniture Showroom

Max was concerned about low profits despite high sales.

• Sofas: GMROI = 0.89
• Coffee Tables: GMROI = 1.67
• Lighting Fixtures: GMROI = 2.25

Action Taken:

• Reduced sofa stock and negotiated discounts with suppliers
• Promoted coffee tables and lights more aggressively
• Increased reordering frequency for high-GMROI items

Result:

• Overall, GMROI rose from 1.2 to 1.9 in 3 months
• Better space usage and cash flow

How to Improve Your GMROI

1. Boost Gross Margins

• Review pricing strategies
• Negotiate better supplier terms
• Reduce discounting unless necessary

2. Reduce Inventory Holding

• Implement JIT or lean inventory models
• Forecast demand more accurately
• Drop slow-moving SKUs

3. Segment Inventory by GMROI

Categorise inventory into A, B, and C based on GMROI. Focus investment on A items.

4. Automate GMROI Tracking

Use inventory management software with built-in GMROI dashboards.

Common GMROI Mistakes to Avoid

• Using Sales Instead of Margin: Gross profit, not revenue, is the key
• Ignoring Seasonality: Adjust GMROI calculations based on seasonal changes
• Lumping Categories: Always analyse GMROI by product type, not just store-wide
• Focusing Only on High GMROI: Sometimes, low-GMROI products build traffic (e.g., essential items)

Tools to Measure and Monitor GMROI

Spreadsheets:

• Create simple GMROI calculators in Excel or Google Sheets

Software Options:

• NetSuite
• Zoho Inventory
• Lightspeed Retail
• QuickBooks Commerce

BI Tools:

• Tableau, Power BI, Looker — perfect for visualising GMROI across categories and time

Conclusion: Let Your Inventory Work Smarter

Your inventory is a major investment. GMROI shows if that investment is worthwhile. By measuring your gross margin return on inventory investment, you’re not just counting sales. You’re measuring value. A good GMROI strategy helps you buy smart, set better prices, and remove products that aren’t making money.

As you review your inventory numbers, don’t settle for surface-level insights. Dig deeper. Ask: Am I putting my money into the right stock? Are my margins strong enough to justify the shelf space? Am I reordering what sells best, or just what I’ve always bought?

The answers lie in GMROI. Use it regularly. Track it by product category. Make it part of your decision-making process. When you change your mindset from just moving products to maximising return on inventory investment, you gain control. This helps improve your cash flow, profits, and growth.

So here’s your next move: start by calculating the GMROI of your top-selling products. Then use that data to guide your next buying cycle. It’s a small shift that can lead to major financial wins.

Need help building a GMROI dashboard or interpreting your numbers? Drop a comment or reach out—we’re here to help your inventory work harder for your bottom line.