A beginner’s guide to sell-thru (sell-through)

Sell-thru is one measurement that seems to cause a lot of confusion.  And, it is probably the one I get the most questions about.  Much like GMROII, I can’t give comprehensive coverage to it in a blog post, but I can give you a start to understanding it.

Is it sell-thru or sell-through?  And what exactly is it?

Either sell-thru or sell-through is correct.  Sell-thru is the percent of a product’s (or category’s or department’s) inventory that sells during a particular period of time.

How do I calculate it?

Formula:  Units Sold/ (Units on Hand + Units Sold)  or  Units Sold/Total Units Received

Example:  A store received 100 units of a promotional cereal in a special display unit on the 1st of the month.  Because the product is a one-time buy, they would like to be sold out by the end of the month.  The buyer believes the product should sell evenly throughout the month.   Two weeks into the promotion 30 units have been sold.

Calculation:  30/100 = 30% sell-thru

To achieve the buyer’s goal, the store needed to sell half of their inventory by this date.  They are behind and need to find a way to increase their sales rate.

NOTE:  I have greatly simplified the example given here.  In the real world, there are always complications.

What do I use it for?

Buyers often use sell thru to determine whether a product that is purchased with a finite amount of inventory will be sold by a pre-determined date.  Sell-thru can also be used to monitor inventory levels for regular products by using beginning of month inventory instead of total units received.

If you have questions concerning sell-thru, or would like to see a similar beginner’s guide for a different measurement, please let me know via a comment or an email.

Note:  Other retail math formulas may be found on the Three Buckets CheatsheetBeginner’s Guides on other retail math topics are also available.

A beginner’s guide to GMROI (GMROII)

If you’re just starting out in retail, you probably have a lot of questions about all of the various retail formulas.  However, many folks seem to find GMROII the most bewildering.  So, here is the beginner’s guide to GMROII – everything you need to get you started with this measurement.

Is it GMROII, GMROI or Jim-Roy?  And, what does it mean?

The answer to the first question is all of the above.  It can be abbreviated GMROII or GMROI, and is pronounced “Jim-Roy.”  GMROII stands for gross margin return on inventory investment.

GMROII is defined as the amount of dollar gross profit a retailer receives in return for every dollar they invest in inventory.

How do I calculate it?

Formula:              Annual Dollar Gross Profit/Average Dollar Cost Inventory

Example:
Annual Dollar Gross Profit = $2,000,000
Average Dollar Retail Inventory = $500,000
Maintain Margin = 35%

Solution:
2,000,000/(500,000*(1-.35))
GMROI = 6.15

**Note:  Often cost dollar inventory figures are not available.  They can be estimated using the maintain margin cost compliment (1-MM).

What do I use it for?

GMROII can be calculated for an individual product, a department, or an entire retail chain.  It is a measure of how efficiently a retailer is using their inventory to produce gross profit dollars.  At a minimum, a retailer’s GMROII must be above 1.0.  (Otherwise they are earning less money than they invested.)

If you have questions concerning GMROII, or would like to see a similar beginner’s guide for a different measurement, please let me know via a comment or an email.

Note:  Other retail math formulas may be found on the Three Buckets Cheatsheet.  Beginner’s Guides on other retail math topics are also available in the Beginner’s Guides Category.

Retail Math & the Class Syllabus

It’s getting closer to the start of the Fall semester, and I’ve begun thinking about classes again.  For me, that means putting together my syllabi and class calendars.  Since I don’t make homework assignments part of my syllabi and I keep the class points fairly vague, my various syllabi don’t change too much from semester to semester.  The fact is, most of my changes revolve around my class calendar.

When it comes to adding retail math into a traditional Retail Strategy class calendar, I’ve found that there are two typical approaches.  The first is to approach retail math as a separate module, covering all of the topics in a 2-3 week span.  This is the approach I tend to use, and I fit the retail math topics into my class calendar right after merchandising.  I find that it works best for me to cover all of the math at once, allowing me to more easily explanation the inter-connectedness of the different measurements.

Excerpt from my class calendar:
Week 9
Customer Relationship Management
Private Labels
Week 10
Merchandise Management
Week 11
Category Management
Exam 3
Week 12
Retail Math – Volume Bucket
Retail Math – Profit Bucket
Week 13
Retail Math – Profit Bucket continued
Retail Math – Asset Efficiency Bucket
Week 14
Retail Math – Scorecards

My co-author, Charles Halliburton, favors the second approach.  He prefers spreading the retail math measurements throughout the semester utilizing them to illustrate how different marketing and merchandising decisions impact the company in a financial way.  With his background in retail merchandising and finance, he is able to use multiple real life examples to tie the topics together.

Both approaches are equally valid, and valuable.  If you’re willing to share, I would love to hear how you approach fitting this information into your semester.

 

Average Initial Margin (Part II)

I’m often asked how to calculate initial margin for a category (i.e. average initial margin.)  The best way I’ve found to explain this is to create a “what if” scenario with numbers, and work it out.

The pricing question posed in my last post (Orbitz, Pricing, & Average Initial Margin) can be analyzed through an average initial margin calculation.  It is a question of a retailer having one cost, but wanting to charge two different retail prices.

To apply numbers to this scenario, we could assume the following:
Cost = $10
Desired retail = $15 and $20
Desired average initial margin = 35%

Calculations:
1.  Determine how many products we must sell at each price to achieve a 35% IMU.  Start by finding what the retail price would be if we were to sell the product for only one price instead of two.
R = C/(1-IMU)
R = 10/.65
R = $15.38

2.  But, we want to use two prices.  So, how many units must be priced for $15 and how many for $20 in order to hit a 35% IMU?  Knowing that the items I price at $15.00 will fall $0.38 short of the target, and those priced at $20.00 will go $4.62 over the target.  To balance these amounts, I must price:**

  • 462 units, or 92.4% of the products (462/(462 + 38),)at $15.00
  • 38 units, or 7.6% of the units (38/(462 + 38),) at $20.00

** 462 units * $0.38 = 38 units * $4.62

3.  What happens to the average initial margin if we change the unit balances up a little?  If, instead of the above percentages, we believe that we should price the products as follows:

  • 80% of the units at $15.00
  • 20% of the units at $20.00

Total Cost
Product A            80 units * $10 cost = $800
Product B            20 units * $10 cost = $200
Total cost = $1000

Total Retail
Product A            80 units * $15 retail = $1200
Product B            20 units * $20 retail = $400
Total retail = $1600

Average IMU = (1600-1000)/1600 = 37.5%

4.  The initial margin percentage didn’t change a great deal, but what happens to the dollar amounts?  That depends on the number of units sold.

Begin by calculating dollar initial margin at the original price of $15.38.  If we project this based on 100 units, the dollar initial margin would be:

R – C = IMU$
$1538 – $1000 = $538

Now, what would the dollar initial margin be if we were to price 80 units for $15 and 20 for $20?  Using the same formula:

$1600 – $1000 = $600

Under this pricing scheme, we make an extra $62.

But, what if instead of purchasing 100 units, we purchased 10,000 units?  Working the numbers out just as we did above, you will see that using the two-tiered pricing scheme will earn the retailer an extra $6,200.

Please comment, or send me an email, if you have any suggestions or questions.

Orbitz, Pricing, & Average Initial Margin (Part I)

Several articles were written last month concerning Orbitz’s methods of targeting Mac users.  A post on the HBR Blog Network by Rafi Muhammed (Should Internet Retailers Discriminate Between Customers?, July 10, 2012) stated:

“So if online retailers can identify customers with different price sensitivities, why not charge different prices by customer type? After all, this is commonly done in the brick and mortar world. Retailers often set different prices in different locations. Target has acknowledged using this practice based on the level of competition at each location: If many rivals are close by, prices are lower, but if it’s the only game in town, prices are higher. Gas stations routinely charge different prices at different locations. Similarly, it’s customary to negotiate for certain types of products and services, so the price that anyone pays for, say, a car will vary based on product knowledge and negotiating skill.”

Muhammed goes on to debate the wisdom and ethics of such behavior, and I highly recommend reading his entire post.  (As Muhammed points out, brick and mortar retailers have long done this in the form of zone pricing.)

From a financial standpoint, what we’re really looking at is the impact on average initial margin (average initial markup) of having 1 cost and 2 (or more) retails.  Thinking through this potential pricing scheme, I decided to run a few numbers, and I’ll be posting those numbers in a couple of days.  If you have suggestions for other numbers or ratios to look at – I’d love to hear them.

Retail Math Books

Over the years I have had to do some real digging to come up with good retail math books.  There are several out there, and I thought I’d list a few of my favorites.  Some of them are out of print now, but the mathematical information in them is as good as ever.   This is by no means a comprehensive list, rather it is a listing of those books I tend to use for reference purposes in teaching my classes.  (The below are in no particular order.)

1.  Retail Merchandise Management by Wingate, Schaller & Miller – This is my all-time favorite.  The version I use was given to me by one of my professors (thank you Dr. Ashton!)  It never wanders too far from my desk.  While many parts of the book are dated, the math concepts are as solid as ever.  And, the many examples it offers are extremely valuable.  The best part of this book is the extreme breadth and depth of coverage it gives to retail math concepts and formulas.   (Note:  this book is out of print, but can be found on www.amazon.com.)    Wingate, J.W., Schaller, E.O., & Miller, F.L.  (1972).  Retail Merchandise Management.  Englewood Cliffs, N.J.:  Prentice-Hall, Inc.

2.  Problems in Retail Merchandising, 6th edition by Wingate, Schaller & Bell – Dr. Ashton gave this workbook to me also.  It was written as a compliment to Retail Merchandise Management, covering the same concepts but giving many more examples and homework problems.  I have found these problems and examples to be very helpful when I need to go deeper into retail math for my graduate level classes.  (Note:  this book is out of print, but can be found on www.amazon.com)    Wingate, J.W., Schaller, E.O., & Bell, R.W.  (1973).  Problems in Retail Merchandising, 6th Edition.  Englewood Cliffs, NJ:  Prentice-Hall, Inc.

3.  The Buyer’s Manual by the Merchandising Division of the National Retail Merchants Association – There are many versions of this particular book.  The one I use is from 1965.  I have tried some of the later versions and have not found them to be as helpful in their coverage of math concepts.   Much like Retail Merchandise Management, this book is dated concerning other concepts, but I have found many parts of it to be helpful in understanding how math principles and formulas apply to analyzing a retail operation.    National Retail Merchants Association.  (1965).  The Buyer’s Manual, Revised Edition.  New York, NY:  The Merchandising Division of the National Retail Merchants Association.

4.  Math for Merchandising by Moore – I really like the way Moore takes a section of each chapter to explain industry jargon to students.  This is something that I often overlook doing in class.  This text also does a very nice job explaining profit measures.  However, I feel it lacks in the areas of asset efficiency.    Moore, E.  (2005).  Math for Merchandising, Third Edition.  Upper Saddle River, NJ:  Pearson Education, Inc.

5.  Merchandising Math by Kincade, Gibson & Woodard – Like most books about retail math, this one has a distinct fashion orientation.  The book includes an interesting chapter on fashion forecasting where it looks at some of the more qualitative aspects of this task.  From a math perspective, I found the book to have good coverage of pricing and P&L statements.    Kincade, D.H., Gibson, F.Y., Woodard, G.A.  (2004).  Merchandising Math:  a managerial approach.  Upper Saddle River, NJ:  Pearson Education, Inc.

6.  Mathematics for Retail Buying by Tepper – This book has been around for some time and has gone through many editions.  It is a favorite in many apparel studies programs.  I appreciate the author’s simple explanations and many examples throughout the book.    Tepper, B.K.  (2008).  Mathematics for Retail Buying, 6th Edition.  New York, NY:  Fairchild Books, Inc.

7. & 8.  I really can’t end up this post without mentioning Retailing Management by Levy & Weitz  and Retail Management by Berman & Evans.  Both of these books are good general retailing texts and have begun to include more and more retail math with each edition.  I have used each as the main retail textbook for my classes at different points in time.

**Please note that I have cited the edition of each book that I have on my shelves, newer editions may be available in several cases.