Average First Margin (AFM)

Average First Margin (AFM) is a weighted average metric that shows the average gross margin percentage on the initial sale of inventory, crucial for understanding retailer profitability before markdowns and additional costs.

Average first margin (AFM) for retailers is a metric that represents the average gross margin percentage made on the initial sale of inventory. It is a weighted average that takes into account the margin of each item sold relative to its sales contribution. This figure is crucial for retailers because it helps them understand their profitability on the merchandise they sell before any markdowns or additional costs are considered.

To calculate AFM, you would typically follow these steps:

Determine the first margin for each item, which is the difference between the selling price and the cost of goods sold (COGS), divided by the selling price.
Calculate the contribution of each item to total sales.
Multiply each item's first margin by its contribution to total sales.
Sum these values to find the weighted average, which is the AFM.

The formula can be represented as:

AFM = Σ (First Margin of Item x Sales Contribution of Item) / Total Sales

AFM is important because it provides retailers with insight into their pricing strategy and the effectiveness of their buying decisions. A higher AFM suggests that the retailer is able to sell merchandise at a price significantly higher than the cost, which is favorable for profitability. Conversely, a lower AFM might indicate that the retailer needs to reassess their pricing or purchasing strategies to improve profitability. Understanding AFM helps retailers make informed decisions about pricing, promotions, inventory management, and overall financial health.