Successful retail businesses are built on numbers, not hunches.
Customer feedback may seem promising, but gross margins show which products drive profitability. Your staff might look busy all day, but sales per square foot reveal when your store is making money. Social media engagement can signal trendy products, but inventory turnover highlights what's actually selling.
Retail math is the set of calculations retailers use to track everything from daily sales and inventory to long-term profitability. McKinsey's research confirms its importance: retailers that moved from the bottom 25% to the top 25% over the past decade were twice as likely to improve key metrics. Their success came from embracing data over intuition.
From pricing and inventory to staffing and expansion, retail math calculations separate thriving retailers from those just getting by. Let's break down the numbers that matter most for your store.
Retail math concepts
- Average inventory
- Breakeven
- Cost of goods sold
- Gross profit
- Gross margin
- Conversion rate
- Retail price
- Sales per square foot
- Inventory turnover
- Discounts
- Sales tax
- Shipping charges
- GMROI
- Shrinkage
- EBITDA
Average inventory
Average inventory calculates how much stock you’re holding over a given period. It’s calculated using this formula: (Beginning inventory + ending inventory) / 2.
This retail metric lets you analyze how effectively your inventory is being managed. If average inventory is high, you might be overstocking—which could result in higher inventory carrying costs and risk of obsolete products. However, if it’s too low, you might be turning customers away through stockouts.
Average inventory also lets you study seasonal patterns to plan future storage space and budget needs. Data might show that you tend to hold more inventory in the summer months. If this is essential because you’re stockpiling for Black Friday, perhaps try to renegotiate terms with your third-party logistics partner. They might be willing to discount the cost of storage if you commit to a larger space for a fixed term (i.e., three months).
Breakeven
Breakeven point shows how much you need to sell to cover all costs. It's the point where you're neither making nor losing money—the minimum amount you’ll need to make to avoid falling into the red.
Here’s the formula to calculate your store’s breakeven point: Total fixed costs / (contribution margin / sale price per unit)
Let's assume a candle business has $2,000 monthly fixed costs. Each candle sells for $25 and costs $10 to make. This means the business has to sell either 133 candles or reach $3,333 in monthly sales to break even. Everything above is profit.
Breakeven analysis helps you test the financial viability of a business or product before launch. If you know that you’d need to sell 200 products to turn a profit, yet you’re averaging five daily sales of similar products in the same category, for instance, it might not be the wisest decision. Perhaps experiment with alternative products or negotiate terms with your vendor to bring the cost price—and therefore, your breakeven point—down.
Cost of goods sold
Cost of goods sold (COGS) represents the direct cost of creating or acquiring your products before marking them up for sale—such as raw materials, direct labor, packaging, and shipping. Unlike fixed costs like rent or utilities, this expense is directly tied to product creation.
Here’s the formula to calculate COGS: (Beginning inventory + purchases) - ending inventory
Picture a bakery starting the month with $1,000 in ingredients, buying $3,000 more supplies, and ending with $800. The cost of goods sold would total $3,200.
COGS is a useful retail math calculation because it can help retailers identify cost-saving opportunities, like negotiating bulk discounts when you notice packaging eating up 30% of costs. It also helps you calculate other metrics (such as gross profit) and file accurate financial reports, such as income statements or balance sheets.
Gross profit
Gross profit is the difference between revenue and COGS. It tells you how much money you have leftover after paying for a product’s expenses, calculated using the following formula: Revenue — COGS.
Gross profit is one of the most important retail math calculations because other expenses—such as rent, taxes, and staff salaries—come from your gross profit. If you only have $2,500 leftover in gross profit after paying for a product’s direct costs, for example, you can calculate your net profit (the amount leftover after paying for all expenses).
You can also make smarter discounting and merchandising decisions when you know each product’s gross profit. If your t-shirts have a gross profit of $5 per unit but dresses have $19, for example, you have more leeway to discount the dresses. There’s more margin to eat into.
💡Pro tip: Not keen on doing manual calculations? TheProfit by product report onShopify admin shows gross profits by category, inventory costs, and more.
Gross margin
Gross margin calculates profit as a percentage of net sales. It’s calculated using this formula: (Net sales — gross profit) × 100.
Let's say a coffee shop makes $10,000 per month with $4,000 in COGS. The store’s gross profit would be $6,000, which we’d express as a percentage of the $10,000 per month in net sales, giving us a gross margin of 60%.
Gross margin is an essential part of retail math because it lets you manage costs. Say, for example, that gross margin is shrinking. Consider renegotiating supplier terms or increasing product prices to remain competitive and profitable.
Conversion rate
Conversion rate is the percentage of visitors who complete a desired action—whether that’s signing up for emails or making a purchase. Data shows the average Shopify storeconverts 1.4% of visitors, yet top performers reach 3.2% to 4.7%.
Here’s the formula to calculate conversion rate: (Number of people who took desired action / total audience) × 100
For example, if 10,000 people visit your store and 200 make a purchase, your conversion rate is 2%. Improving this to 3% might sound like a small change. In reality, you’ve doubled your sales from the same footfall.
Conversion rate helps you identify which marketing channels bring in buyers, not just browsers. You can also spot friction points when comparing conversion rates across different touchpoints and channels.
Retail price
Retail price is the dollar amount that customers pay for your product. While the math is simple—add your desired profit to costs—smart pricing requires a solid understanding of different pricing strategies, competitive research, and market trends.
Common pricing strategies include:
- Cost-plus pricing: Add a set percentage to costs.
- Value-based pricing: Price based on perceived worth (think premium skincare).
- Premium pricing: Higher prices to signal luxury or exclusivity.
- Keystone pricing: Double the wholesale cost.
- Competitive pricing: Match or beat competitor prices—common in consumer packaged goods and electronic retail.
Sales per square foot
Sales per square foot shows how much revenue each square foot of your store generates. It’s calculated using this formula: Total net sales / Total retail square footage.
This metric helps you compare performance and productivity across several stores. For example, a fashion boutique making $500,000 in its New York store might sound impressive on the surface. However, it only makes $500 in sales per square foot—which is much lower than your Chicago store, which turns over $350,000 but generates $725 per square foot.
Sales per square foot is also a great measure of layout efficiency. You might find that sales increase after displaying impulse buys at checkout or showcasing best-selling products to the right of the entrance.
Inventory turnover
Inventory turnover measures the number of times you sell and replace your inventory in a given period. It’s calculated using this formula: COGS / average inventory.
Inventory turnover ratio is important for businesses selling perishables, seasonal items, or trend-sensitive products. If turnover is low in a grocery store, for example, the retailer is likely losing money by holding products that become obsolete, damaged, or unsellable before they’re purchased.
Inventory turnover by product also lets you optimize storage space. Place high-turnover items by the door to your retail stockroom to reduce the time retail associates spend retrieving products, ultimately improving productivity.
Discounts
Adiscount is applied when a product is sold at a lower price than advertised. They’re used to encourage purchases, clear inventory, or reward loyalty.
Whilediscounts can be powerful tools for driving sales, they directly impact profit margins and need to be used strategically. The goal isn't just to drive one-off sales—it's to encourage behaviors that benefit your business long-term, such as larger order values or repeat purchases.
Effective discount types include:
- Percentage off (20% off entire purchase)
- Dollar amount ($10 off orders over $50)
- Buy-one-get-one (BOGO) offers
- Free shipping thresholds
- Bundle deals
Pet food retailer Tomlinson’s previously had a disjointed setup meant cashiers had to manually apply discounts at checkout. After migrating to Shopify, Tomlinson’s unified its data into a single operating system. Eligible discounts now automatically apply online and in-person at checkout—the latter of which resulted in a 46% reduction in the average number of required taps at checkout.
“It used to require multiple steps to apply a percentage off products that were part of a promotion,” says owner and operator Kate Knecht. “But with Shopify, the right discounts populate automatically when you add items to the cart. It’s a thing of beauty.”
Sales tax
Sales tax is a fee charged by state and local governments on retail purchases. It's calculated as a percentage of the selling price and varies by location. For example, if you have nexus in a particular state with a 6% sales tax rate, a $100 purchase would cost the customer $106.
As a retailer, you're responsible for collecting sales tax from customers, holding these funds separately from your business income, and submitting them to the appropriate authorities.
💡Pro tip:Shopify Tax helps you track where you need to collect sales tax and charge customers accordingly. You can even submit sales tax filings to the appropriate state without leaving your Shopify admin.
Shipping charges
Shipping charges are the costs involved in transporting products to your customers.
Since online customers are particularlysensitive to shipping charges, building shipping costs into product prices can help you offer "free shipping" while maintaining margins.
Key shipping rate strategies include:
- Flat rate shipping: Charge a fixed amount regardless of order size
- Free shipping: Absorb shipping costs to encourage purchases
- Calculated rates: Charge based on carrier costs
- Threshold-based: Free shipping above certain order values
- Weight-based: Rates vary by package weight
Gross margin return on investment
GMROI measures how much profit you make for every dollar invested in inventory. It factors in all product-related costs, from manufacturing to storage to sales expenses, to give you a precise view of inventory profitability. Use this formula to calculate it: Gross profit / average inventory costs.
This retail math calculation allows you to compare product performance by showing which items generate the most profit per inventory dollar. You can also make smarter inventory investments by directing more resources to high-GMROI products and categories.
Shrinkage
Shrinkage happens when your actual physical inventory is less than what you’ve recorded. It’s calculated as a percentage: [(Recorded inventory - actual inventory) / recorded inventory] × 100.
For example, if your records show 1,000 items while you find only 950 in your warehouse, your shrinkage percentage is 5%.
This figure—which requires regular inventory audits to calculate—can highlight inventory loss which costs retailers an estimated $112 billion per year. Conduct further investigations to find (and fix) the underlying cause. This is commonly theft, administrative errors, vendor fraud, damaged goods, or processing mistakes.
Earnings before interest, taxes, depreciation, and amortization (EBITDA)
EBITDA shows your core business performance by removing costs unrelated to daily operations. It’s calculated by adding Net income + interest + taxes + depreciation + amortization.
This metric is useful for businesses with high upfront costs, like manufacturers needing expensive equipment or startups investing heavily in software development. These companies might look unprofitable on paper due to the upfront costs, but EBITDA shows their true operational performance by excluding these temporary expenses.
EBITDA also helps you compare performance across companies with different tax situations or accounting practices. You can assess your earning potential by showing what your business can generate before financial obligations and non-cash expenses.
While EBITDA offers valuable insights, it excludes important costs like interest payments and depreciation. View it alongside other metrics like net income and cash flow for a more accurate view of your business health.
Take the stress out of retail math with Shopify
Retail math is a daunting part of operating a retail business, but one that’s crucial to optimizing store performance, calculating profitability, and making smarter business decisions. It’s made infinitely easier when you’re working with a clean dataset.
Shopify's unified commerce architecture ensures all your order, inventory, and customer data flows through a single platform, regardless of where the sale happens. This eliminates the complexity of maintaining multiple systems, making retail math calculations straightforward through Shopify Analytics' automated reporting.
Research from a leading independent consulting firm shows the impact of this unified approach:
- Operational improvements created by Shopify POS enable up to a 5% uplift in gross merchandise value (GMV).
- Retailers using Shopify POS save the equivalent of 0.4 full-time employees per store location.
- Shopify POS has a 22% lower total cost of ownership relative to other vendors.
“When all sales are coming through Shopify, you don't have to maintain the integrations required when you use different systems to manage each channel,” says Alexandra Mcnab, COO of Bared Footwear. “We can re-invest where it matters: delighting customers with impeccable products and service, and growing the business.”
Retail math FAQ
What kind of math is used in retail?
Retailers use math to make decisions about their inventory, measure store performance, and analyze the success of their marketing campaigns. They do this through calculations such as gross margin, sales per square foot, and breakeven point.
What is an example of retail math?
A common example of a retail math formula is calculating markup. If you buy a product for $10 (cost) and want a 50% markup, multiply $10 by 1.5 to get your selling price of $15.
What is the formula for retail?
There isn't just one retail formula; retail math involves multiple calculations. The most commonly used formulas include:
- Markup = (retail price - cost) / cost × 100
- Gross margin = (revenue - cost of goods sold) / revenue × 100
- Inventory turnover = cost of goods sold / average inventory
Why is retail math important?
Retail math tells you if you're pricing products profitably, managing inventory effectively, and achieving sales growth. Without these calculations, you'd be running your business on guesswork rather than data.
