The True Costs of Product Stock Outs for Ecommerce Brands
Every retailer dreads the scenario of running out of products, also known as stock-outs.
During the pandemic, a friend who sells on Amazon noted, "The only problem we have is actually staying in stock."
It might feel like a good thing when your products are flying off the shelves, but there are a lot of downsides and risks to stock-outs that Amazon sellers need to be aware of.
Some of these are obvious, but there are second order effects that can be more damaging than you might think.
This article delves into stock outs, and just how damaging going out of stock can be.
We'll also cover the causes of stock-outs and provide practical strategies to avoid them, thus ensuring consistent sales and customer satisfaction.
If you want to hear more about this vital topic, tune in for a joint webinar with our own Director of Operations and Seller Candy.
Costs and Consequences of Product Stock-Outs:
Understanding the costs of stock-outs is vital for any retailer. Let's delve into the different areas where stock-outs can impact your business.
Each stock-out represents a lost sales opportunity, directly impacting the bottom line.
Recurring stock-out situations can lead to significant revenue loss over time.
Every day you're out of stock is lost money.
It gets worse, not only are you losing money NOW, but impacting your future revenue because your keyword ranking will drop like a rock.
Organic Sales Ranking Effect:
Stock-outs can negatively impact your organic sales ranking, making your product less visible to potential customers. This effect can last long after you get back in stock.
It's also a lot harder to regain your sales rank after you lost it. You'll need to spend more money on promotions, and maybe some tough competitors have taken your spot in the SERPS.
If that wasn't bad enough...
Potential Loss of Amazon Performance Badges:
Amazon grants certain products "Amazon's Choice" or "Best Seller" badges based on their sales performance.
If you have one of these coveted badges, you'll definitely lose it when you go out of stock!
Losing these badges can cause your CTR and Conversion Rate to plummet, and your sales to go with it.
Impact on Repeat Sales:
Stock-outs can frustrate customers and discourage them from making repeat purchases, especially if the product is frequently out of stock.
If you sell through subscribe and save, you might even get kicked off the program resulting in losing all your valuable subscription customers.
Lastly, we'll look at how stock-outs can inflate your advertising costs.
Increase in TACOS:
Total Advertising Cost of Sales (TACOS) measures the impact of advertising spend on overall sales.
If your product is out of stock, the advertising spend does not translate into sales, leading to an increase in TACOS.
There are also certain ad units that show multiple products on Amazon, when you go out of stock on one of the items, the ads might still run, causing you to spend money on ads, but customers can't buy!
This can even mess with your Off Amazon marketing. You need to remember to turn off Facebook and Google ads when you're out of stock, and not only that, but Affiliates sending traffic to your listings might decide to route that valuable high converting traffic to a competitor listing instead!
What’s the Cause of Stock-Outs?
Now that we understand the costs of stock-outs, let's explore what causes them. This will help us devise effective strategies to prevent them.
Incorrect Sales Predictions:
Overestimation of sales can lead to unsold products occupying valuable warehouse space and capital, whereas underestimation can cause stock-outs.
For example, if you predict sales of 100 units a day but actual sales are 150 units, you could run out of stock in two-thirds the expected time.
Use Continuous Improvement principles in your inventory forecasting, and review over each time period how far off your predictions were from the actual result. There are also some great tools that you can use to help improve your forecasts.
Now, let's consider how issues in your supply chain can lead to stock-outs.
Supply Chain Issues:
Problems in the supply chain, such as delays from suppliers or shipping issues, can cause stock-outs.
COVID also resulted in massive disruptions in the supply chain, products from China in some cases couldn't be shipped, container prices went through the roof, and port congestion meant ships waited weeks to unload inventory.
Other recent examples include the Suez Canal incident with the Ever Given container ship stuck in the canal for 6 days, paralyzing global trade.
While it might feel like inventory is just a number on a screen, especially since many sellers rarely even see their stock, inventory is real, tangible, and exists in the world, making it subject to all kinds of situations and circumstance.
However, supply chain issues aren't the only external factors that can lead to stock-outs.
Seasonal Demand Fluctuations:
During certain times of the year, like the holiday season, demand for certain products can spike, leading to stock-outs if not adequately prepared.
This can happen even if your product isn't a toy or seasonal decoration - during holidays traffic on Amazon skyrockets and almost every category gets more sales.
Next, we'll look at how your own ordering practices can contribute to stock-outs.
Inefficient Reorder Practices:
If reordering new stock is not done in a timely manner or in sufficient quantities, it can lead to stock-outs.
Usually this happens when you don't keep an eye on your inventory numbers and lead times. Always know your lead times and keep some buffer so that you don't run out of stock. You can also keep a buffer of stock in a 3PL like ours to drip feed inventory and safeguard yourself from stocking out.
Finally, we'll examine how the absence of an efficient inventory management system can lead to stock-outs.
The Absence of an Efficient Inventory Management System:
Without an efficient inventory management system in place, it becomes incredibly challenging to maintain the right stock levels.
Such a system helpsin tracking inventory levels, predicting demand, and initiating reorders at the right time.
For instance, implementing an inventory management system like SoStocked or an ERP allows businesses to automate many of these tasks, making it easier to avoid stock-outs.
Stock-Out Avoidance Strategies:
Armed with the knowledge of what causes stock-outs, we can now focus on strategies to prevent them. These tactics will help you maintain optimal stock levels and ensure customer satisfaction.
Accurate Sales Forecasting:
Using historical sales data and market trends to accurately predict future sales can help maintain the right stock levels. Check your data from last year and see where you got surprised with increased demand.
Also check google trends and amazon keyword trends to see if products are moving faster than you expected.
Amazon also has their own tools that can assist in avoiding stock-outs.
Utilizing Amazon’s FBA In-Stock Rate Tool:
Amazon's FBA In-Stock Rate tool can be a valuable resource for sellers. It helps monitor your inventory performance and provides recommendations to improve in-stock rates. You can use it by logging into your FBA account, navigating to the 'Inventory' tab, and then selecting 'Inventory Planning.'
The tool will display your In-Stock Rate and suggest ways to improve it, such as increasing your reorder quantity or frequency.
Next, we'll delve into the importance of efficient reorder practices.
Efficient Reorder Practices:
Establishing a consistent and efficient reorder process can help avoid stock-outs. However, even the best reorder processes can fall short without effective supply chain management.
Effective Supply Chain Management:
Ensuring a reliable supply chain can help avoid delays and ensure products are available when needed.
Talk with your suppliers often and stay aware of any factors like Chinese holidays or Port strikes that can impact smooth movement of your goods.
Lastly, we'll discuss the importance of an efficient inventory management system in preventing stock-outs.
Implementing an Efficient Inventory Management System:
As discussed earlier, an efficient inventory management system can greatly help in avoiding stock-outs by maintaining optimal inventory levels.
Whether you use SoStocked, an ERP, or your own system, make sure you implement it effectively and have your team actually use it.
In conclusion, stock-outs can have far-reaching implications for your business, including the loss of revenue and customer loyalty, and a drop in your organic sales ranking.
However, by understanding the causes of stock-outs and implementing the strategies suggested above, you can successfully avoid these situations and ensure consistent sales and customer satisfaction.
Take proactive action and you can avoid going out of stock and all the disaster than can come with it.
It's now time to take proactive measures and secure the future of your business.
If you want to learn more about this topic, join the upcoming webinar cohosted with Seller Candy.