Profitability metrics for retail products and categories (or SKU profitability) are generally similar to other measures of profitability, such as unit and percentage margins. Certain refinements have been developed for retailers and distributors, however.
- Markdowns, for example, are calculated as a ratio of discount to original price charged.
- Gross margin return on inventory investment (GMROII) is calculated as margin divided by the cost of inventory and is expressed as a “rate” or percentage.
- Direct product profitability (DPP) is a metric that adjusts gross margin for other costs, such as storage, handling, and allowances paid by suppliers.
The purpose of retail product profitability metrics is to assess the effectiveness and profitability of individual product and category sales. Retailers and distributors have a great deal of choice regarding which products to stock and which to discontinue as they make room for a steady stream of new offerings.
By measuring the profitability of individual stock keeping units (SKUs), managers develop the insight needed to optimize such product selections. Profitability metrics are also useful in decisions regarding pricing, display, and promotional campaigns.
- ^ Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; and David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc.