Retail Math 101 – Not the sexiest title to ever cross your news feed, but this is an area where you absolutely need to have clarity and understanding. After all, my guess is while you love your shop, you’re also in it (just a little bit) for the money.
Everyone here loves Pitch Perfect, right? Awesome – moving on to the good stuff.
Now there are A LOT of retail math terms, it’s in and of itself a completely different creature than the typical math you learned in how they classify and think of the inventory owned. So today, we’re going over retail math 101 basics so you can feel confident at trade shows, vendor meetings and discussions with other business owners.
It’s retail math made simple.
If you’re looking for more information on selling wholesale, check out this post on 24 Wholesale Terms You Need to Know – It includes examples and guidelines, plus a free worksheet to create your own wholesale business terms.
For these retail math examples, we’ll assume the below:
Item retail price: $10
Item cost: $5
Total Units Sold: 100u in 7 weeks
Total Revenue: $900
Units Purchased: 150
Price set by the retailer to sell its merchandise.
Our example, $10
If selling wholesale, this may also be referred to as the MSRP, or manufacturer’s suggested retail price. So it’s the retail price you’d recommend the retail sell your product for in-store.
Cost of Goods:
Amount paid to the vendor, plus or minus any additional fees to acquire the goods (freight/shipping, taxes).
Our example, $5
Initial Mark Up / IMU %:
The difference between the price you paid and what you charge your customers.
Retail Price – Cost = Mark Up $$
Mark Up $$/Retail= Mark Up Initial %
($10-$5)/$10 = 50% mark up
Average Unit Retail (AUR):
The average price an item sold for.
Total Revenue (or Sales) / Units Sold = Average Unit Retail
$900 / 100 = $9.00 AUR
Gross Margin (Profit) $$ and GM% (or rate):
Similar to IMU%, however it uses actual sales or revenue, instead of sale price, so this is after items have sold.
Sales – Cost = Margin $$
Margin $$/Sales = Gross Margin % (GM%)
$900 – ($5*100) = $400 GM $$
$400 / $900 = 44.4% GM rate
This is part 1 of 6 of the Retail 101 Beginner Series
Part 3: Retail Math 101 (ya know, how to make money)
Part 5: Why Your Online Shop Needs a Blog (plus 12 ideas to get started)
Units On Hand:
Sounds like what it is. Your current units in stock.
Units Purchased – Units Sold = Units On Hand
150u – 100u – 50u on hand
Inventory at Retail:
Stock (same as inventory) is the value of your goods and is typically discussed in terms of “retail dollars” instead of at cost. If you carry more than one price point in your shop (I’m sure you most likely do), it’s the total value of your goods.
Scarves retail at $15, own 20u
Necklaces retail at $20, own 30u
Hats retail at $50, own 20u
[(Retail Price #1 * Units Owned #1) + (Retail Price #2 * Units Owned #2) + (Retail Price #3 * Units Owned #3)]
($15*20u)+($20*30u)+($50*20u) = $1900
- Inventory at Cost would be calculated the same way except use the (cost * units owned) instead.
Average Retail Price:
Inventory at Retail / Units of Hand
$1900 (from above) / (20u+30u+20u)
$1900 / 70u = $27.14 average retail
Average Inventory at Retail (AVI):
A component used to determine the health of inventory in Turn measurement. It is seen as a more accurate assessment, as most shops have fluctuations throughout the year.
Calculation depends on the time period, but often done on quarterly, seasonal, or yearly basis. BOM = Beginning of Month, EOM = End of Month.
In this example, we’ll do an analysis of our Spring season (Jan-June).
[Jan Inv at Retail BOM + Jan Inv at Retail EOM + Feb Inv at Retail EOM + March Inv at Retail EOM + April Inv at Retail EOM + May Inv at Retail EOM + June Inv at Retail EOM] / 7 = Average Inventory
Why do we include the beginning of retail in January? We need to review all inventory owned throughout the sixth month period, if we only started with January EOM, we would be missing any information that happened during that time which would affect future calculations.
- Average Inventory at Cost is the same calculation except you would use Inventory at Cost BOM and EOMs instead.
Gross Margin Return on Investment (GMROI):
This is THE number that was used to determine bonus payouts, so you better believe it’s important to the health of a company. This is your return on capital investment.
Gross Margin $$ / Avg Inv at Cost
Do you see how these all build on each other? Are you even still with me? (insert hand raised emoji)
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The retail value after returns, allowances for damaged or missing goods and any discounts. This is the number you’re familiar with using – its the simple “money brought in the door” which would take discounts into account, less any damaged goods
Turnover (or Turn):
This measurement shows you how well your inventory is selling relative to the amount you carry to achieve those sales. It can be an abstract concept, but essentially it’s a good measurement of a healthy business (meaning you’re carrying an appropriate amount for the sales you do), although a good turn rate can mean very different things by category or shop. We’ll discuss that more in another post…this is getting too much, no?
Net Sales / Avg Inventory at Retail
Sell Thru Rate (ST %):
The amount sold versus inventory brought in.
Sell Through Formula:
Units Sold / (Units Sold + Units On Hand)
100 / (100 + 50) = 66.7% ST
Average Sales (for given time period):
Sales Units / # of weeks (or days/month, etc)
100u / 7 weeks = 14.3 units sold per week
Weeks of Supply (WOS):
Helps you review and forecast your inventory needs in relation to your sales trend. It can be a super easy indication of when you’ll need to place an order based on your vendor leadtimes.
Current On Hand / Average Sales
50u / 14.3 = 3.5 weeks
So in our current example, if your vendor or production leadtime was 4 weeks, you’d be projecting to run out of inventory before the next shipment arrives!
This sounds important, no? This is when profit earned equals your fixed expenses. No profit has technically been earned yet, but this establishes the point when you’ll start “taking money to the bank”.
Phew! So I think that’s enough for today. You’re officially graduated from Retail Math 101. If you have any questions on these retail math examples or definitions, please reach out.
I want you to walk away from this feeling more confident on the financial side of your business. Often this is easier to talk through with specifics, so let’s hear them. Leave a comment below or shoot me an email at firstname.lastname@example.org!
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