Stockout Costs Guide
Ever been excited to come across the product you’ve been looking for online only to discover it’s out of stock? We’ve all been there. As a customer, it can be a huge letdown. For an ecommerce business, it’s a surefire way to lose revenue.
When products are constantly out of stock, it can cause a big dip in potential sales, drive customers away, and ultimately stunt business growth.
In this article, we’ll go over what causes stockouts and how to prevent them from impacting long-term business growth.
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What are stockout costs?
Stockout costs is the capital lost from inventory that has become unavailable for the customer to purchase. When a customer cannot buy something because it is not in stock, the business loses money. This is especially detrimental to a business if there is no indication on when the item will be back in stock and available for purchase.
How to calculate the cost of stockouts
Stockouts cost your business, but exactly how much? You can calculate the cost of stockouts by using the following formula:
(Number of days out of stock * Average units sold per day * Price per unit) = Cost of stockout
For example, imagine a shoe retailer has been out of their most popular sandal for 3 days. The sandal is sold at $50 per pair and the shop sells around 15 pairs per day. They would calculate their stockout cost as follows:
(3 days * 15 pairs * $50) = $2,250
With inventory management tools and the use of reorder points, this company would have been able to avoid the stockout cost of $2,250.
What causes stockouts?
Stockouts happen for a variety of reasons – and many times, they’re inevitable and out of your control. However, with the help of good partners and technology, you can mitigate some of those issues.
These are the top factors that contribute to stockouts:
Inaccurate demand forecasting
Demand forecasting can seem daunting – it’s no small feat to try to predict how much of a certain product you need to meet customer demand. Your business needs a solid grasp of historical sales data so you can make accurate forecasts – if not, you may face stockouts. In addition to inaccurate data, seasonality of your business and geographic locations (of both your fulfillment center and end customer) can all affect your demand forecasting.
Supplier and production delays
Reliable partners are crucial to running a successful business. If you’re met with constant delays and you aren’t able to get products into the hands of your customers, you’re likely to face stockouts.
If these types of delays happen often, you may need to consider switching to a different supplier or find other ways to improve supply chain management.
Poor cash flow management
Not having enough cash on hand can also cause stockouts. You may have forecasted the amount of inventory you need to have in stock, but you cannot buy it without sufficient funds.
If this is a recurring issue for your business, more funding or better financial planning could be beneficial. Companies like Kickfurther help ecommerce businesses secure the funding they need to purchase inventory, avoid stockouts, and grow their business. Additionally, taking a look at your business plan and finances can help you understand when is the best time to purchase inventory – this way you’ll be able to determine when you have more money to spend.
Mistakes happen! If you’re manually counting inventory or have an outdated inventory management system, you may face issues with inaccurate inventory counts. As a result, stockouts could occur.
Implementing a reliable inventory management system is one way to ensure human error is minimized.
How a stockout affects your business
Most often, stockouts not only harm your business, but also significantly impact your customer’s experience. As a result, stockouts are something you’ll want to focus on avoiding. Stockouts create disappointment and frustration, for you as a business owner and for the customer who is ready to buy and may need your product quickly. Ultimately, it leads to a loss in revenue and can potentially damage your brand’s reputation.
However, if you face stockouts, there are some ways to turn a negative into a positive. Read on to understand the pros and cons of stockouts and how they affect your business.
1. Losing a customer to a competitor
Think about what it costs to attract a single customer to your online store. If you have a stockout, not only will you see a major drop in conversions because there’s nothing to buy, but the customer will most likely purchase from a competitor that has the item currently in stock. And they may continue to purchase from the competition again in the future.
After a bad shopping experience due to stockouts, the chance of the customer returning to your store later is slim. 91% of customers aren’t willing to engage with an online store in light of a bad experience. It’s no doubt that stockouts can take a huge toll on potential business growth.
If an out-of-stock product is hard to come by, some customers are willing to subscribe to back-in-stock notifications, which is a great strategy to alert and encourage customers to purchase when items are back in stock. But even so, this doesn’t guarantee a sales conversion in the future.
2. Paying for a canceled order
It’s one thing for a customer to know a product is out of stock before they attempt to purchase it, but it’s another thing when a customer makes a purchase only to find out the item is unavailable. This occurs when inventory is poorly managed and stock counts are inaccurate.
If this happens, you’ll have to get in touch with the customer with the bad news and offer a refund. The cost of canceled orders can add up over time and harm your business’s reputation.
3. Negative reviews
Negative customer reviews and poor customer satisfaction can make or break your ecommerce business. If customers regularly see your product is out of stock, they may leave negative reviews on your site or third-party review sites. Potential customers can see these reviews and may perceive your brand as unreliable. Your negative reviews provide an advantage for brands selling similar products, giving them insight into what your brand is underdelivering on so they capitalize on it.
4. Losing revenue
As mentioned earlier, stockouts can cost your business money. Using the stockout cost formula, you can determine just how much. Loss of revenue can be detrimental to businesses of any size. Using the suggestions above can help you set your brand up for success so you don’t experience stockouts and therefore, a loss in revenue.
5. Makes your products seem popular
Products that are in high demand have a good chance of being out of stock. This is true for products that are created in limited quantities or for items that have recently gone viral. When there is not enough inventory to meet customer demand, a stock out could signal that your item is desirable and exclusive. When this happens, shoppers are likely eager to make a purchase when you restock.
6. May lead to future sales if there is a CTA
If done right, you can use stockouts to your advantage. People are likely vying to get their hands on popular products and want to be first in line when it returns. Having customers fill out a form to get on a waitlist or submit their email for an alert when the item is back in stock is a great way for you to turn a stockout into a sales opportunity.
How to prevent stockouts from costing your ecommerce business
Avoiding an out-of-stock situation is critical for direct-to-consumer brands. Customers can look up alternatives in a matter of seconds if your products aren’t readily available. Not only do you lose sales and decrease your average order value, but you may also lose potential and returning customers for good, impacting your customer lifetime value.
To avoid stockouts from impacting the success of your business, here is what you can do.
Calculate your safety stock
Safety stock is the excess product you keep on hand in case of an emergency or retail supply chain failure that causes a drop in inventory levels. To accurately calculate safety stock, you will need the following for each SKU:
- Maximum daily usage
- Maximum lead time
- Average daily usage
- Average lead time
Once you have the inventory data for each SKU, follow the steps below:
Step 1: Calculate your max: (maximum daily usage x maximum lead time)
Step 2: Calculate your average: (average daily usage x average lead time)
Step 3: Subtract the average number from the maximum number for a complete safety stock calculation: (Maximum daily usage x maximum lead time) – (average daily usage x average lead time)
Here’s an example of how it works in practice:
- Company A can has sold as many as 20 units of dog food in a single day (maximum daily usage)
- It has taken up to 20 days for the product to be shipped from the manufacturer to a fulfillment center (maximum lead time in days)
- Company A sells an average of 10 units of dog food a day (average daily usage)
- On average, it takes about 15 days to get the dog food delivered to a fulfillment center (average lead time in days)
So for Company A, their safety stock levels would be:
(20 x 20) – (10 x 15) = 250
This means Company A would need to have about 250 units of dog food safety stock available at any time. With 250 units of safety stock, selling about 10 units of dog food each day (70/week) means they have enough stock for about 3.5 weeks.
Note: The maximums should be adjusted for seasonality, including if you forecast higher demand (e.g., for major Black Friday/Cyber Monday promotions) or expect major shipping delays (e.g., Chinese New Year shutdowns).
Forecast future demand
Planning for demand can be tough, but it’s not impossible. By using historical inventory data to predict future sales trends, you can make better decisions on how much inventory you need in stock at a given time.
For instance, you can use data such as the amount of product you sold during a specific season versus a specific day (like a holiday) to make decisions on when you’ll need to order more inventory than usual. Similarly, if demand for your product decreases (e.g., travel products during the COVID-19 pandemic), you may need to plan for a stock reduction and have less safety stock available to avoid having too much working capital tied up in inventory.
If you’re using multiple warehouses to store inventory, you can use historical data by location to optimize stock levels per location based on demand.
Recognizing these types of trends will help you prepare for a change in sales while optimizing inventory control and inventory storage on the operations level.
“Between shipping new collections for wholesale earlier in the year and Q4 madness for direct-to-consumer sales, we’ve been able to get through our heaviest seasons while staying ahead of production using ShipBob’s inventory forecasting tools — even as our order volume more than quadrupled in less than a year.” Ryan Casas, COO of iloveplum
Invest in inventory management
Forecasting future demand is just one aspect of inventory management. You must ensure the right inventory levels are available to not only meet customer demand but also budget costs.
Not having enough inventory to fulfill orders and meet customer demand is one thing, but you also don’t want to have too much inventory, which can lead to higher inventory carrying costs as well as “dead stock” or outdated inventory that can’t be sold (i.e., it’s expired, obsolete, or out of season).
Without proper inventory management, you’ll inevitably see a negative impact on your bottom line. Fortunately, managing your inventory doesn’t have to be hard. You can either invest in inventory management software or, even better, you can store your inventory with a tech-enabled 3PL like ShipBob that provides built-in inventory management tools along with robust order fulfillment services.
“We have access to live inventory management, knowing exactly how many units we have in each fulfillment center. It not only helps with our overall process in managing and making sure our inventory levels are balanced but also for tax purposes at the end of the year. ShipBob simplified the entire process for our accountants and for us.” Matt Dryfhout, Founder & CEO of BAKblade
How tech-enabled 3PLs use inventory data to maintain optimal stock and mitigate stockout costs
Unlike using manual inventory sheet templates, many ecommerce businesses partner with a tech-enabled 3PL like ShipBob that makes it easy to track inventory levels and movement at any given time. With ShipBob, you can automate reorder points, view inventory counts in real-time at the SKU level, and run reporting on inventory trends and forecasting to ensure you never run out of stock again.
“So many 3PLs have either bad or no front-facing software, making it impossible to keep track of what’s leaving or entering the warehouse.
On the supply chain side, I just throw in what we placed at the factory into a WRO in the ShipBob dashboard, and I can see how many units we have on-hand, what’s incoming, what’s at docks, and so on. I can see all of those numbers in a few seconds, and it makes life so much easier.”Harley Abrams, Operations Manager of SuperSpeed Golf, LLC
To maintain optimal stock, you’re given the inventory data needed to answer questions like:
- How much inventory do I currently have on hand at each ShipBob fulfillment center?
- What were my historical stock levels at any point in time in any location?
- How many days do I have left until a SKU will be out of stock?
- By when do I need to reorder inventory for each product?
- If I run a promotion or flash sale on my store, how will this affect my available inventory levels?
- And more!
“ShipBob’s analytics tool is really cool. It helps us a lot with planning inventory reorder quantities, seeing when SKUs are going to run out, and we can even set up email notifications so that we’re alerted when a SKU has less than a certain quantity left. There is a lot of value in their technology.” Oded Harth, CEO & Co-Founder of MDacne
Preventing stockouts should be a high priority for your ecommerce business. The best thing you can do is focus on optimizing your supply chain so you can better manage inventory and prepare for future demand.
“Another ShipBob integration I love is Inventory Planner. It saves me hours every week in Excel spreadsheets, and I can raise a PO in minutes when it used to take me hours. For every order I placed for years, I was ordering too much or not enough. Between inventory forecasting tools and the ability to auto-create WROs, we don’t have stockouts much anymore. I sleep better at night.”Wes Brown, Head of Operations at Black Claw LLC
By partnering with a tech-enabled 3PL like ShipBob, you’re given the retail fulfillment expertise, technology, and inbound and outbound logistics support you need to get products to your customers’ doors quickly.
“We have a Shopify store but do not use Shopify to track inventory. In terms of tracking inventory, we use ShipBob for everything — to be able to track each bottle of perfume, what we have left, and what we’ve shipped, while getting a lot more information on each order.”Ines Guien, Vice President of Operations atDossier
Learn about ShipBob’s robust fulfillment center network and proprietary technology by clicking below to request a fulfillment quote.
Stockout costs FAQs
What is the difference between a stockout cost and a shortage cost?
A shortage refers to a general shortage of goods, where a stock out refers to a specific item unavailable in inventory. A stockout can occur when there was lack of ordering, lack of capital to order, customer demand, or items on backorder.
Why are stockout costs difficult?
Stockouts can have a heavy impact on your business. Costs include lost inventory which could lead to lost sales. This could last until there is a stock replenishment. Stockouts often go unanticipated, which could lead to difficulties when trying to get back on track.
What are the two types of stockout costs?
There are two types of stockouts: one is related to delivering products to customers, the other is regarding production issues that cause delays in getting your products.
Why are stockout costs difficult to determine?
There are various factors that go into calculating your stockout costs, which can make it challenging to determine. Try using this formula next time you need to calculate stockout costs: (Number of days out of stock * Average units sold per day * Price per unit) = Cost of stockout