Margin KPIs

While you’ll likely look at Sales first, your margin KPIs are just as critical to
understanding the health and sustainability of your business and driving next
actions. After all, margins are what your business actually delivers to the
organization.
You may have only one margin metric that you track and manage to, or you may
have visibility to multiple margin KPIs, including:
• Initial Mark-Up (IMU)
• Gross Margin – usually Sales less COGS*
• Other Margins – e.g., incorporating transportation costs, inventory holding costs or other “costs
to service” etc.
*What’s included in COGs can vary by company definition. This is why it’s important to understand what
is and is not included in each calculation/KPI definition!
In the end, there is also a net or final margin for the company, which comprises what is left after SG&A
(Selling, General and Administrative Expenses), Marketing and other costs, and is not typically yours to
manage to. As a Merchant or Planner, you are responsible for a version of the Merchandise Margin from
which these other costs are deducted.

Type and Frequency of Margin KPIs

The following are the most commonly looked at Markdown and Margin KPIs and the time periods they
are most valid for. You’ll note that Markdown KPIs are included in this category, as these are the primary
lever impacting the realized margin. Further, decisions about markdowns are the primary way that you
can influence the margin as you manage the business in-season.
Daily Weekly Monthly Quarterly/ “Product Lifetime”
Seasonally/
Annually
• N/A (can • Gross Margin • Same as Weekly • Same as Monthly • Same as Monthly
fluctuate too Value
plus
widely to drive • Gross Margin %
daily reaction) • Promo/POS • Receipt IMU %
Markdown Value (initial mark-up
• Promo/POS rate)
Markdown %
• Permanent
Markdown Value
• Permanent
Markdown %
These figures should always be compared to Plan (where applicable), Forecast (where available) and
Last Year.

© Merchant Academy, B.V. 2022. All rights reserved. Confidential. Page 1

In addition to the most common or typical margin KPIs above, you also may have visibility to your
average unit retail (AUR). When you also have your average initial retail AIR, comparing the two is often
a quick way to see how much of your product is being sold at – or near – full price. Both of these KPIs
can be applied at the item level, but also rolled up to larger groupings of products, so it represents the
blended AIR and AUR.
You can also check the AUR against both Plan and LY to see if discounting is running higher or lower than
expected, so looking at AUR in this manner is another way to determine if unexpected discounting is
impacting your margin.
However, AUR will also capture whether or not there has been a major shift in the value of the product
going out the door versus either your Plan or LY. This may be due to a change in regular price retail or
the mix of product in the category you are looking at, so while it’s a handy measure, its shifts vs. Plan
and LY may not reflect only discounting and a margin impact.
It should also be noted that if your business is managed at cost value, then you will not have a
Markdown Plan… Markdowns only exist in a plan if you are managing your inventory at retail value.

What Are You Looking For?

In reviewing your margin and profitability figures there are three main
insights you are trying to gain on your business:
• Are you achieving (or exceeding) your margin plan? Pay particular
attention to the margin value vs. the margin percentage. After all,
you don’t take a percentage to the bank.
• What areas of the business are driving your margin results (what is
strong, what is weak)? This can be determined by looking at both
the value and % of margin for different sections of the business -
by Brand, by product category, by product type, etc.
• What role are both the IMU (Initial Mark-Up) and
promo/markdown activity having on the profit result? Are these
results in line with your expectations given your strategy and the
time in the season?

Turning Insights Into Actions

You never look at your markdowns and resulting margin in isolation. You
consider them in context of your sales performance and your inventory
position. But all other things being equal, you want to turn your margin
insights into action by changing tactics to increase profit without increasing
your (future) inventory risk.
In practical terms, you are trying to find ways to increase the profit-per-
item-sold, and selling more of the items that get you higher margin.

© Merchant Academy, B.V. 2022. All rights reserved. Confidential. Page 2

Your main levers are to:
• Increase your initial mark-up (usually
mainly a pre-season activity, but can
be employed in-season during the re-
negotiation of costs for re-orders)
• Reduce your markdown cost
• Offset your markdown cost
Vendor markdown support (money they give
you to “pay” for their markdowns) is the most
common avenue to offset your cost. But this
will only improve your margin if your financial
systems allow you to recognize and take the
credit before the calculation of your margin.
Your business rules, your position in the market and your company strategies will influence which of
these levers you actually have available to you. But each week you should be reviewing all of your
options in order to determine which actions will help you achieve your margin goals.
Some things to ask yourself as you review IMU, Markdowns and Margin:
• Can I negotiate a better cost on product still to come in?
• Can I increase my orders on items with higher IMU?
• Should I dial-up or dial-down upcoming promotional activity?
• Do I need to accelerate or hold off on taking permanent
markdowns?
• Can I get vendor support/funding to offset the costs of the actions I
need to take?
Remember, Margin is a critical KPI… but you can’t control it directly. You can only take actions that will
drive sales, IMU or markdowns, which will result in a margin for your business.

© Merchant Academy, B.V. 2022. All rights reserved. Confidential. Page 3