Previously, we analyzed the problem of retailers overstocking products without an increase in demand. We also discussed the challenge of highly volatile products that are often out of stock, and how to manage that through better purchasing practices and by identifying substitutes.
In this piece, we decided to dig in further and identify just how much revenue is left on the table when a product is out of stock. What’s the difference between the sales of a given product that is frequently out of stock and that same product always in stock?
Our co-founder Bobby Fatemi answers that question with some very compelling data analysis.
This case study uses a highly in-demand flower product for a current Happy Cabbage client and analyzes the sales driven by this product over a 90-day period in order to estimate what sales would be if the product was always in stock.
Let’s get on the same page with a couple easy definitions:
A stockout occurs when customer orders for a product exceed the amount of inventory kept on hand (otherwise known as out-of-stock). This situation arises when demand is higher than expected and the amount of normal inventory and backup stock is too low to fill all orders.
We define a primary product as a product that when purchased, drives the majority of the total order dollars. In contrast, a secondary product typically is thought of as an ‘order add-on’ and drives a smaller share of the customers’ total spend per order.
We’re going to discuss sales of a primary product, a well-known and in-demand flower product, that drives the majority of the total order dollars.
Keep in mind that for Primary Products, a customer may not shop at your store if those products or a meaningful substitute are not available. This is especially true of shoppers that are using your website menu to investigate what you have in stock before ordering or visiting your store.
- For the flower product selected in this case study, total sales revenue at the end of 90 days is 60% of what it could be, if not for product stockouts (Figure 3).
- In a scenario in which supply issues do not lead to stockouts, this translates to additional revenue of $6,665 for this product after 90 days of sales (Figure 3). Similarly, the impact after 45 days with no stockouts for this product is increased revenues of $4,607 (shown in Figure 2).
- In conclusion, any action taken to reduce the likelihood of product stockouts for important revenue-driving products will result in higher sales for the product, and the store. (Figure 1)
Figure 1 shows the actual cumulative sales for this primary product over the course of a 90-day sales period, as well as the expected cumulative sales in a world in which there are no stockouts occurring during the period. The difference between the lines on the chart (the area denoted in green) is the sales impact of stockouts at particular points in time.
Figure 1: Sales But For Stockouts
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Sales Potential with no Stockouts
Diving deeper, we can see below that when we are 50% of the way through the period (45 days in), the total difference in cumulative sales is $4,607.
By 90 days in, we can see this total difference reaches $6,665 in sales loss due to the stockouts for this product.
- When at all possible, ensure you have inventory coverage of all primary products on your shelves. If you aren’t sure which of your products meet this criteria, you need to talk to us right now.
- When primary products are highly volatile because the supplier is inconsistent, stock alternatives that will meet the customer’s needs equally and also serve as a primary product.
- While the difference in expected sales vs actual sales based on stockouts is not entirely lost revenue, many customers of primary products are looking to buy those specifically. If they look at your menu and don’t see those products, they may never step into your store; or worse, shop with a competitor that isn’t out of stock.
- The easiest way to analyze which products need to be in stock at certain times, and to know which are your primary products, is to use Happy Buyers.
Case Study Caveats
- The product identified for this case study is a regular menu item, one that is a primary product, and has no recent upward or downward trends in sales for the 90 day study period.
- By selecting a primary product with a neutral sales trend (flat, no increase or decline in sales over time), but specifically one that has stable daily unit sales (uniformly distributed throughout the period), we can best illustrate the methodology we use to estimate the dollar impact of stockouts in the period.
- In this case study, stockouts are implicitly identified using days with no unit sales as the proxy for a stockout occurring. This is justifiable as we specifically use a product with regular daily unit sales throughout the period.
- In generalizing this methodology or extending this work, we would utilize historical daily inventory snapshots to explicitly identify whether there is a product stockout for a particular sales day.
- It’s important to highlight the fact that the expected gains in revenue are at the product sales level. In practice, when a product experiences stockouts, oftentimes retailers (such as users of Happy Buyers) have available substitutes to limit any negative impacts to the Retailers' top-line revenues. However, for a select group of products with high customer loyalty, not all the sales can be recovered and best efforts need to be made in order to mitigate stockout events.