Skip to main content
How to increase margin and avoid higher stockout costs by reducing sales velocity

How to increase margin and avoid higher stockout costs by reducing sales velocity

CEO & Co-Founder at Flieber

Higher stockout costs due to lack of stock is one of the worst things that can happen to any online retailer. While in offline retail, a stock-out has the solitary impact of lost sales until the next batch arrives, in online retail, it means loss of ranking position, which has a much longer-lasting effect. What can a seller do to keep this from happening? Usually, retailers place all their focus on inventory replenishment. But the truth is that two lines of attack can help you avoid stock-outs—inventory and sales.

In the ideal world, it is best to focus your efforts on having the inventory that you plan to sell. But many times this isn’t possible. Your sales might have picked up faster than you expected; your supplier might have delayed the production, or even the global supply-chain may have suffered a significant disruption as we’re currently experiencing with the Coronavirus. What can be done in this case?

Knowing what your current sales rate is and what your ideal sales velocity should be will help to avoid the stock-out and is the first step to a dependable decision. Be sure to have this information in real-time and check it very often, preferably daily, as things happen very fast in this industry, and small changes in one part of the process have an impact on everything that comes later.

The next step is the analysis of the different scenarios. You can divide your impacted products into three main clusters: the ones that will be out of stock for less than seven days, the ones that will be out of stock between 7 and 15 days, and the ones that will be out of stock for more than 15 days.

For the first group, many times, the best decision is to do nothing. It is proven that most marketplace algorithms do not heavily punish products that rarely get out of stock and that do so for less than seven days. So, it is essential that you analyze the stock-out history of that product, and also how critical this product is for your portfolio. Options like temporarily suppressing the listing are also an option in this case.

For the second group, things start getting trickier. It is known that marketplace algorithms start penalizing products that are either continuously out of stock or that stay out of stock for longer than seven days. In this case, trying to reduce the out of stock period is very important, and increasing price or reducing advertising becomes a solution to be considered. For products with higher ad sales, reducing advertising is the best option; for products with higher organic sales, increasing the price is the best option. A combination of both is also a good measure.

For the third group, you definitely have to do something more aggressive. Here, knowing as much in advance as possible that you are going to run out of stock shortly is critical. With that information, you can start taking measures that have a small impact on your sales, but that can solve the out-of-stock sooner. For example, if you know 80 days in advance that you will be out of stock for 20 days, you just have to reduce your sales velocity by roughly 20% to avoid the stock-out.

It is essential to mention that price changes also may have negative impacts on your products. If you are a reseller, price changes affect the competition for the buy-box, reducing your chances of winning it. If you are a private label seller, a significant rise in price will affect your product ranking. It can also take out any badges you have for your products, reducing your sales drastically, and having an undesired outcome. Increasing price is more effective in smaller changes, allowing you to understand the cause and effect in the process.

The most important part of the reduction in sales velocity as one of the strategies to avoid stock-outs is that you are selling the same quantity of products. However, you are avoiding the negative impact of the stock-outs and generating a better margin at the same time. If used wisely, this strategy can have a very positive effect on your business and genuinely differentiate you from the competition in the long term

Here at Flieber we help our clients to achieve higher margins by synchronising their inventory to their sales. Feel free to reach us and schedule a Demo Session!

At Flieber, we allow online retailers to go back to their origins and focus on marketing and sales again. With a hands-on approach, we take care of the operations, giving full visibility to the process and turning our clients into decision-makers. No need to deal with suppliers in China in the middle of the night; no need to follow-up with freight forwarders to make sure that the products will arrive on time; no need to find last-minute alternatives to solve a problem that will delay the delivery. Leave the headaches to our experienced team and enjoy being an online retailer again.