Formulas

Gross Margin= Sales - cost of goods sold

Margin % = (Rs. Retail – Rs. Cost) / Rs. Retail

Markdown % = Rs. Markdown  /  Rs. Net Sales

Markup = The difference between the cost of an item and its selling price.

Markup cancellation =  Reduction from original markup %

3

GMROL

GMROL – Gross Margin / Cost of full time employee

Example: If in a month Gross margin – Rs 20 Lacks and cost of full time employee in a store is Rs 25000 then,

GMROL = 2000000/ 25000 = Rs 80 / full time employee.

4

GMROF

GMROF – Gross Margin / Total selling area (in sq. ft.) in the store

Example : If in a month Gross margin– Rs 20 Lacs and total selling area is 5000 sq. ft then

GMROF = 2000000/ 5000 = Rs 400 / sq. ft.

5

GMROI – Gross Margin / Average inventory value during the period, in a store

Example : If in a month Gross margin– Rs 20 Lacs and during this time the store carries an average inventory of Rs 1 Crore then

GMROI = 2000000/ 10000000 = 0.25

GMROI

GMORII

 An important tool in analyzing inventory, sales and profitability is GMROI (also known as GMROII) which stands for Gross Margin Return On Inventory Investment. The GMROI calculations assist buyers in evaluating whether a sufficient gross margin is being earned by the products purchased, compared to the investment in inventory required to generate those gross margin dollars.

 Definition: Ratio measuring inventory profitability as it relates to the gross profit margin earn on sales.Also Known As: GMROIIExamples: Gross Margin Rs ÷ Average Inventory Cost = GMROI

 

ROI

GMROI (Gross Margin Return On Investment) =  (GM% x turnover) / (1 - markup %)

An example of how to calculate ones return on investment, (ROI). Last August the stores sales were 1,814,476, beginning inventory was 4,875,911, and ending inventory was 4,693,452. August maintained a mark-up of 28%.  

The formula for reaching the ROI in this scenario would be as follows : Last Years August sales 1,814,476  x  28% =  508,053.28  Beginning Inventory 4,875,911 + Ending Inventory  4,693,452  = 9,569,363 divided by 2 = 4,784,681 508,053.28 divided by 4,784,691.5 = 10.6 % ROI (Return on Investment)

COGS

Cost of Goods Sold (COGS) = Beginning Inventory + Purchases - End Inventory

The above formula is an example of a company that sells finished goods. The formula can be applied to one week, one month or a year, but must be the same for each value of the formula.

The formula for a manufacturer includes raw goods and unfinished product in inventory.  There is no formula for a service firm, which relies exclusively on market research of competitors and deciding a pricing strategy that allows profitability.

Here is another way of stating the same formula:inventory at beginning of year + purchases or additions during the year = goods available for sale - inventory at end of year = cost of goods sold

Calculating Percentage Amount

The longer a person is out of school, the easier it is to forget how to use percents and other basic business math formulas. Computer programs, cash registers and automated point-of-sale systems can easily complete the percentage calculations; however there will be moments when retailers will need to process the numbers manually.

There are three parts to a percentage problem: rate, base and percentage amount. The rate is the percent, the base is the total and the percentage amount is a fraction of the amount.

To find the percentage amount, change the rate to a decimal and multiply by the base. Percentage Amount = Rate x BaseExample #1:Find 25% of 150

Percentage Amount = .25 x 150Percentage Amount = 37.50

Example #2:If your weekly salary is taxed 30%, how much is deducted if you make 295 a week?

Percentage Amount = .30 x 295Percentage Amount = 88.50

Calculating Rate

To find the rate, divide the base into the percentage amount. Because our rate is a percent, move the decimal two places to the right and add a percent sign.

Rate = Percentage Amount ÷ BaseExample #1:15 is what percent of 75

Rate = 15 ÷ 75Rate = .20Rate = 20%

Example #2:If you received a shipment from a vendor consisting of 250 widgets, but 65 were broken during transport, what percent are damaged?

Rate = 65 ÷ 250Rate = .26 or 26%

Calculating Base

To find the base, divide the rate into the percentage amount. Again, because rate is a percent, move the decimal two places to the right and add a percent sign.

Base = Percentage Amount ÷ RateExample #1:$150 is 45% of what amount?

Base = 150 ÷ 45%Base = 333.33

Example #2:On Christmas Eve, your store sells a total of 2500. It was 85% of the total sales for the year. What are your store's sales?

Base = 2500 ÷ 85%Base = 2941.17

Calculating Percentage Increase/Decrease

To find the percent up or down, first find the difference between the two amounts. Then divide that number by the first of the two amounts. Finally, convert the fraction to a percent by moving the decimal two places to the right and adding a percent sign.

% Increase/Decrease = Difference Between Two Figures ÷ Previous Figure % Increase/Decrease = (This Year - Last Year) ÷ Last Year% Increase/Decrease = (Planned Rs. - Actual Rs) ÷ Planned Rs.Example #1:If Easter sales were 5200 this year and last year they were only 3400, what was the percent increase?

% Increase = 5200 - 3400 ÷ 3400% Increase = 52.9%

Example #2:If your store's sales for February were planned at 22,500 and actual sales were 18,000, what was the percent reduction?

% Decrease = 22500 - 18000 ÷ 22500% Decrease = .20 or 20%

Inventory Turnover

"inventory turnover." Turnover is the number of times you sell your average investment in inventory each year.

Turnover  = net sales for period / average stock for period

Here is another way of stating the same formula:  Cost of Goods Sold from Stock Sales during the Past 12 Months Average Inventory Investment during the Past 12 Months

Inventory turns : The retail sales for a period divided by the average inventory value for that period. Most retailers are in the range of two to four turns a year.

Average Stock  =   sum of each periods Beginning of Period stock  +  the last End of Period stock / # of periods

Average Inventory Cost

 Definition: Item price minus discounts, plus freight and taxes. 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

Controlling your Inventory

Open to Buy Goods inventory control is critical to ensuring an adequate level of stock is on hand for the amount of sales being generated. Having too much inventory (or the wrong type) during certain periods can slow your cash flow and reduce profits with too many markdowns. On the other hand, if you under buy and miss sales opportunities then you are not making your potential profit. A retailer can be sure to stock the right amount of the right products at the right time by using an Open-To-Buy (OTB) plan.

Open-To-Buy can be calculated in either units or dollars. OTB is essentially the difference between how much inventory is needed and how much is actually available. This includes inventory on hand, in transit and any outstanding orders.

In order to take advantage of special buys or to add new products, some of the OTB dollars should be held back. This also allows the retailer to react to fast-selling items and quickly restock shelves.

Consider maintaining an OTB plan for your business as a whole, but also plan for each category of merchandise you stock. The plan can be maintained on paper, in a spreadsheet or by purchasing one of the several retail software packages available that contain Open-To-Buy programs.

16

Merchandise intensity &

Service intensity

Merchandise intensity = total inventory value / total selling area (in sq. ft.). This denotes value of inventory per sq. ft.

Service intensity = total selling area (in sq. ft.) / total number of full time employee. This denotes the selling ft. serviced by one staff.

The Open-To-Buy Formula

Planned Sales+ Planned Markdowns+ Planned End of Month Inventory- Planned Beginning of Month Inventory----------------------------------------= Open-To-Buy (retail)

For example, a retailer has an inventory level of 150,000 on July 1st and planned 152,000 End of Month inventory for July 31st. The planned sales for the store are 48,000 with 750 in planned markdowns. Therefore, the retailer has 50,750 Open-To-Buy at retail.

Note: Multiply that number by the initial markup to reach the OTB at cost. If our markup is 40%, then our Open-To-Buy at cost is 20,300.

Before placing your Open-to-Buy plan into operation, ask yourself if each number is realistic. Does it make sense for the way you do business? Keep in mind that many of the figures on your inventory plan are only guidelines. A good rule of thumb is if your actual ending inventory is within five percent of your plan, you are doing very well.

Sample 6 Month Plan

6-Month OTB Plan June July August September October November

Beginning Of Month Inventory $

155,000 150,000 152,000 157,000 157,000 165,000

Sales 47,000 48,000 50,000 50,000 52,000 48,000

Markdowns 1,000 750 750 1000 1500 1000

Open-To-Buy 43,000 50,750 55,750 51,000 61,500 37,000

End of Month Inventory $

150,000 152,000 157,000 157,000 165,000 153,000

Sell Through

Sell through % = units sold / (units sold + on hand inventory) 

Sell-through is a percentage of units sold during a period (for example 1 month).

It is calculated by dividing the number of units sold by the beginning on-hand inventory (for that same time period).

Example: During the month of August you sell 100 shirts. You received 300 shirts in receipts. You end August with 900 unit’s shirts of stock (End of Month Stock).  What was your Beginning On-Hand units of shirts and what was your Sell-through?

Beginning of Month stock (BOM) = EOM 900 units - Receipts 300 units + Sales 100 units = 700 units

Sell-through = Sales 100 units / Beginning Inventory (BOM) 700 = 14.3% Sell-through in August.

BOM means Beginning of MonthEOM means End of Month

Breakeven

Breakeven = Fixed Costs / (Revenue – Variable Costs)

Breakeven Analysis:  Simply stated, this formula indicates how much sales volume must be accomplished in order to cover all costs (fixed and variable), and begin generating a profit.  In other words, it is the point in sales volume at which you have no profit and no loss. This is most commonly applied to a business that sells product.

Weeks of Stock

Inventory divided by average weekly sales for a given period of time.

If you have 10,000. worth of inventory in sweaters, and your total sales of sweaters for the past 5 weeks is 20,000. the calculation would look as below : 20,000 divided by 5 = average weekly sales of 4,000. 10,000. divided by 4,000.00 = 2.5

This means that if you did not replenish your sweater inventory and sales continued at the same rate, you would deplete your inventory of sweaters to zero within 2 1/2 weeks.

By the way, what are the odds that the your inventory would sell at the "same rate" week after week.  Maybe this is why clothing stores are always out of my size ...  

Retail Pricing Strategies

There are many outside influences that affect profitability and a retailer's bottom line. Setting the right price is a crucial step toward achieving that profit. Retailers are in business to make a profit, but figuring out what and how to price products may not come easily.

Before we can determine which retail pricing strategy to use in setting the right price, we must know the costs associated with the products. Two key elements in factoring product cost is the cost of goods and the amount of operating expense.

Definition: The price paid for the product, plus any additional costs necessary to get the merchandise into inventory and ready for sale, including shipping and handling.

Also Known As: COGS, cost of salesExamples: The formula for calculating Cost of Goods Sold is Beginning Inventory + Purchases - Ending Inventory. The cost of goods sold is subtracted from sales to determine the gross profit on an income statement.

Retail Pricing Strategies

Cost of GoodsThe cost of goods includes the amount paid for the product, plus any shipping or handling expenses. The cost of operating the business, or operating expense, includes overhead, payroll, marketing and office supplies.

Regardless of the pricing strategy used, the retail price of the products should more than cover the cost of obtaining the goods plus the expenses related to operating the business. A retailer simply cannot succeed in business if they continue to sell their products below cost. 

Operating expense Definition: The sum of all expenses associated with the normal course of running a business.Also Known As: Cost of operating a businessExamples: The expenses of operating a retail business include rent, water, power, telephone, wages, advertising, office supplies and insurance

Retail Pricing Strategies

Now that we understand what our products actually cost, we should look at how our competition is pricing their products. Retailers will also need to examine their channels of distribution and research what the market is willing to pay.

Many pricing strategies exist and each is used based on particular a set of circumstances. Here are a few of the more popular pricing strategies to consider:Mark-up PricingMarkup on cost can be calculated by adding a pre-set (often industry standard) profit margin, or percentage, to the cost of the merchandise.

Profit MarginDefinition: A ratio of profitability calculated as earnings divided by revenues. It measures how much out of every dollar of sales a retail business actually keeps in earnings. Examples: The Acme Company produces widgets that sell for 50 each. It costs Acme 10 to produce the widget and it also pays an additional 5 in packaging. That makes the company's net income 35 per widget (50 - (10 + 5)) and its revenue 50. The profit margin would be (35 / 50) or 70%.

Retail Pricing Strategies

MarkupDefinition: A percentage added to the cost to get the retail selling price.Also Known As: mark-on, markup

 Examples: A widget bought for 5 and sells for 10 has a mark-up of 100%. (Add 5 to the 5 cost to get the price.) A widget bought for 2, which sells for 3, has a mark-up of 50%, (Add 1 to the 2 cost to get the price.) Be sure to keep the initial mark-up high enough to cover price reductions, discounts, shrinkage and other anticipated expenses, and still achieve a satisfactory profit. Retailers with a varied product selection can use different mark-ups on each product line.

Vendor Pricing

Manufacturer suggested retail price (MSRP) is a common strategy used by the smaller retail shops to avoid price wars and still maintain a decent profit. Some suppliers have minimum advertised prices but also suggest the retail pricing. By pricing products with the suggested retail prices supplied by the vendor, the retailer is out of the decision-making process. Another issue with using pre-set prices is that it doesn't allow a retailer to have an advantage over the competition.

Minimum AdvertisedDefinition: A suppliers pricing policy that does not permit its resellers to advertise prices below some specified amount. It can include the resellers' retail price as well.Also Known As: MAP Pricing

Competitive Pricing

Consumers have many choices and are generally willing to shop around to receive the best price. Retailers considering a competitive pricing strategy will need to provide outstanding customer service to stand above the competition.

Pricing below competition simply means pricing products lower than the competitor's price. This strategy works well if the retailer negotiates the best prices, reduces costs and develops a marketing strategy to focus on price specials.

Prestige pricing, or pricing above competition, may be considered when location, exclusivity or unique customer service can justify higher prices. Retailers that stock high-quality merchandise that isn't available at any other location may be quite successful in pricing their products above competitors.

Psychological Pricing

Psychological pricing is used when prices are set to a certain level where the consumer perceives the price to be fair. The most common method is odd-pricing using figures that end in 5, 7 or 9. It is believed that consumers tend to round down a price of 9.95 to 9, rather than 10.

Odd-PricingDefinition: A form of psychological pricing that suggests buyers are more sensitive to certain ending digits.Examples: Odd pricing refers to a price ending in 1,3,5,7,9 just under a round number (e.g., 0.79, 2.97, 34.95). Even pricing refers to a price ending in a whole number or in tenths (e.g., 0.50, 6.10, 55.00).

Other Pricing Strategies

Keystone pricing is not used as often as it once was. Doubling the cost paid for merchandise was once the rule of pricing products, but very few products these days allow a retailer to keystone the product price.

Definition: A pricing method of marking merchandise for resell to an amount that is double the wholesale price.Also Known As: Key stoningExamples: The only department in our retail store that allows keystone pricing is our gift department. Because we face a lot of competition with our other product categories, the remainder of our merchandise is priced using a 40% markup.

Multiple pricing is a method which involves selling more than one product for one price, such as three items for 1.00. Not only is this strategy great for markdowns or sales events, but retailers have noticed consumers tend to purchase in larger amounts where the multiple pricing strategy is used.

Other Pricing Strategies

Discount pricing and price reductions are a natural part of retailing. Discounting can include coupons, rebates, seasonal prices and other promotional markdowns.

Mark Down

Definition: Planned reduction in the selling price of an item, usually to take effect either within a certain number of days after seasonal merchandise is received or at a specific date.

As you develop the best pricing model for your retail business, understand the ideal pricing strategy will depend on more than costs. It also depends on goods pricing practices.

It is difficult to say which component of pricing is more important than another. Just keep in mind, the right product price is the price the consumer is willing to pay, while providing a profit to the retailer.

Loss Leader Pricing

Merchandise priced below cost is referred to as loss leaders. Although retailers make no profit on these discounted items, the hope is consumers will purchase other products at higher margins during their visit to the store.

Loss leaders are goods or services offered at steep discounts (generally below cost) in order to attract new customers to a store. It is a time-honored practice that has been met with much success, especially by large discount retailers. The intent of this pricing strategy is to not only have the customer buy the (loss leader) sale item, but other products that are not discounted.

When to Use Loss Leader Pricing Brand Awareness Increased Traffic Loss leader precaution 

Loss Leader Pricing

Retailers understand that the selling the right product for the right price, at the right time is what makes a business profitable. While retail pricing strategies may vary from one business model to the next, implementing good pricing practices should be a standard for all retailers. Not only do good pricing practices improve customer satisfaction but it also assures compliance with the law.

Pricing errors can cost a retailer much more than a dissatisfied customer. Poor pricing practices can result in undercharges that eat away at a retailer's profit. Haphazard or inefficient pricing can also lead to civil or criminal fines if a retailer is convicted of charging more than the advertised shelf price.

The Federal Trade Commission and the National Conference on Weights and Measures say it can be relatively easy to improve pricing practices -- and in the process, boost customer satisfaction, your bottom line and compliance with the law. Here are their step-by-step suggestions:

Develop written procedures for all forms of pricing activity in your store. Include ways to ensure that the price in the store's computer matches the posted or advertised price. Remember that your customer expects to receive the lowest price posted or advertised.

Develop training programs for store employees that stress your commitment to accurate pricing.

Designate a pricing coordinator for your store.

Give one employee responsibility for the accuracy of prices of all Direct Sale Delivery items. Make sure DSD vendors check with the pricing coordinator before they do any pricing.

Check prices of a random sample of items - 50 or so - every day to ensure that the price in the store's computer matches the posted or advertised price.

Make sure prices in every aisle, section or area of the store are checked several times a year. This is the only way you will find all of the undercharges.

Have the inventory audit team conduct a pricing audit while they're doing an inventory audit.

Use hand-held scanners to speed price audits. Your wholesaler may be able to provide them.

Use a portable label printer during price audits to immediately replace incorrect or missing shelf labels.

Offer your customers a reward if they are overcharged. Giving one item free (up to a maximum dollar value) to any customer who correctly reports an overcharge builds customer loyalty and support.

Contact trade associations for how-to manuals on pricing accuracy. Food Marketing Institute at www.fmi.org; 800 Connecticut Ave., NW., Washington, DC 20006; 202-452-8444. National Retail Federation at www.nrf.com; 325 Seventh St., NW., Washington, DC 20004; 202-783-7971.

Contact your local weights and measures officials for information about inspection procedures and pricing laws. For a copy of the price verification procedure adopted in 1995, contact: National Conference on Weights and Measures at www.nist.gov/owm; 15245 Shady Grove Road, Suite 130, Rockville, MD 20850; 301-258-9210.

Encourage your trade association or wholesaler to set up an industry monitoring program.

36

Conversion rate

Conversion rate = total number of transactions (invoice) /total number of footfall in the store X 100

How may customers out of 100 who enter your store leave with a purchase

Measures how well you convert “Shoppers to Buyers”

The higher the conversion rate the better

37

Average Transaction Average transaction (Ticket size) = total sale / total number of invoice.

How much does the average customer spend in the store.

Critical number as its measures your ability to sell more of what you have, to customers you already have

It should always improve.

38

Items per Invoice

Items per invoice (Basket size) = total number of items sold / total number of transactions

Measures how many items the average customer purchases

Tells us how we are performing in suggestive selling

It should continuously increase

Thank You