GMROI – Gross Margin Return on Inventory Investment
DefinitionGMROI measures how efficient and profitable you are at turning your inventory into gross profit. It indicates how many dollars of gross margin you generate for every dollar invested in inventory. The higher your GMROI, the better you are at wringing profit from your product mix and inventory levels. It shows your inventory is aligned with demand and selling at full price.
How to CalculateGMROI = (Annual Gross Margin ÷ Average Inventory) x 100 To break this down:
- Gross Margin = Total Revenue – Cost of Goods Sold
- Average Inventory = (Beginning Inventory + Ending Inventory) / 2
BenchmarksGMROI can vary widely depending on the retail sector: Overall, a GMROI of 2.0+ is considered healthy across retail categories. Anything under 1.0 signals potential issues with inventory management and product mix.
Why It MattersTracking GMROI allows retailers to identify negative trends and optimize inventory to maximize gross margins. It provides insight into which products generate the highest return on investment. With rising costs across the supply chain, effectively managing GMROI through careful inventory planning and merchandising strategies is more critical than ever.
Ecommerce Conversion Rate
DefinitionThe ecommerce conversion rate is the percentage of website visitors that complete a desired action, like making a purchase or signing up for a newsletter. It measures your ability to convert traffic into customers.
How to CalculateEcommerce Conversion Rate = (Total Number of Conversions ÷ Number of Website Visitors) x 100 Where conversions are any desired action like sales, email sign-ups, downloads, etc.
BenchmarksAverage ecommerce conversion rates vary significantly by industry and target action: Top-performing ecommerce sites typically have conversion rates between 2-4%, while rates below 2% indicate opportunities for optimization.
Why It MattersConversion rate is one of the most important ecommerce KPIs because it directly measures how effectively you are turning website traffic into business results. The higher your conversion rate, the more customers you acquire from the same amount of traffic. Lifting conversion rate just a few percentage points has a big revenue impact. Tracking this metric allows you to identify weak points in the customer journey and funnel. You can then optimize pages and touchpoints to reduce friction and get more visitors completing purchases.
Average Order Value (AOV)
DefinitionAverage order value (AOV) is the average dollar amount spent per order on your online store. It is total revenue divided by total number of orders.
How to CalculateAOV = Total Revenue ÷ Total Orders
BenchmarksAOV varies based on the products sold: The overall average is $109 across industries. You want your AOV to be competitive within your product vertical.
Why It MattersTracking AOV allows you to identify changes in purchase behavior over time. For example, a decreasing AOV could indicate customers are buying fewer items per order or purchasing lower priced products. Combined with conversion rate, AOV helps determine the revenue impact of each visitor to your site. Higher AOVs drive more revenue without requiring more traffic. You can lift AOV by optimizing cross-sells, upsells, discounts, and promotions around your most popular or high margin items. Understanding your AOV benchmarks is key for forecasting and making data-driven decisions.
Customer Lifetime Value (CLV)
DefinitionCustomer lifetime value (CLV) is the total revenue you can expect from an average customer over their entire lifetime with your business. It is a prediction of the net profit you will gain from your relationship with a customer.
How to CalculateThere are a few methods to calculate CLV, but a simple formula is: CLV = Average Order Value x Purchase Frequency x Average Customer Lifespan Where:
- Average Order Value = revenue per order (discussed above)
- Purchase Frequency = how often the customer places an order
- Average Customer Lifespan = how long in months or years the customer remains active
BenchmarksThere are no broad benchmarks for CLV due to differences in business models and industries. However, a good rule of thumb is CLV should be 3:1 of customer acquisition cost (CAC). Having CLV exceeding CAC means your customer relationships are profitable in the long run.
Why It MattersUnderstanding customer lifetime value allows you to determine which segments are most valuable to focus on. You can shape product selection, promotions, and messaging around your most profitable customers. CLV also informs how much budget you can justify investing to acquire new customers. Shoot for positive return on CAC by having CLV exceed the costs. High lifetime value customers have a lower churn rate and make repeat purchases over many years. CLV represents the ultimate value of your marketing and retention strategies.
Customer Acquisition Cost (CAC)
DefinitionCustomer acquisition cost (CAC) is the total cost involved in acquiring a new customer. This includes advertising, promotions, discounts, paid search marketing, and all other marketing expenditures made to acquire new customers.
How to CalculateCAC = Total Customer Acquisition Costs ÷ Number of New Customers CAC should include all marketing, sales, and promotional expenses dedicated to acquiring new customers for a given period. Divide this total acquisition spend by the number of new customers gained.
BenchmarksLike CLV, acceptable CAC varies significantly across industries depending on average order values and profit margins. On average: You want to keep CAC as low as possible while still meeting volume and growth targets. This requires balancing acquisition spend against the expected lifetime value per new customer.
Why It MattersMonitoring CAC ensures your marketing expenditures are efficient and driving a positive return on investment. If CAC creeps up, you may be wasting budget on underperforming channels, campaigns, or ad placements. Keeping close track of CAC movements helps you optimize the acquisition funnel to control costs and get maximum results from marketing spend. This leads to profitable growth over the long term.
Customer Retention Rate
DefinitionThe customer retention rate is the percentage of customers you retain over a given time period. It shows your ability to generate repeat purchases and loyalty. High retention means customers repeatedly purchase from you vs. competitors.
How to CalculateCustomer Retention Rate = ((CE – CN) / CS) x 100 Where:
- CE = number of customers at end of time period
- CN = number of new customers acquired during period
- CS = number of customers at start of time period
- The average retention rate for all retail industries is around 63%.
- SaaS and subscription businesses target over 80%+.
- Ecommerce retention of 50-70% is generally solid.