What is the real cost of stock-outs in ecommerce?

Frequent stock-outs and low assortment can seriously harm short-term revenue, and also create significant, and long term, consequences to your brand’s reputation and trade relationships. 

Catching stock-outs quickly and connecting with supply partners is paramount to resolving silent or hidden barriers impacting growth.

Calculating the cost of stock-outs

The most direct consequence of stock-outs is loss of revenue. However assessing the value of stock-outs can take many shapes Some examples include:

Lost Volume = (Avg Sales or Demand- Waste)- Avg Sales on stockout days

• x Avg Retail Price= Lost Share
• x List Price= Lost Revenue 
• x Gross Margin= Lost Profit

You could also look at lost sales from brand switchers. For example, # of estimated switchers x their lifetime value = Lost Loyalty

Regardless, these numbers can add up fast-even for relatively low-cost items.

For example, consider how much money was lost across some key CPG categories during the pandemic due to consumer demand and supply chain changes.

According to data from NielsenIQ, those toilet paper shortages added up to major losses for bath tissue brands—to the tune of $836.5-million USD (or a little over $1-billion CAD!) for the period between May 2020 and February 2021, in the United States alone.

Stock-outs on multipurpose cleansers cost U.S. brands another $352-million USD ($425-million CAD); ready-to-eat cereal shortages resulted in losses of nearly $137-million USD (more than $165-million CAD)—in fact, losses due to stock-outs in the top 10 categories alone amounted to more than $2.9-billion USD, or $3.5-billion CAD. Across categories, the direct costs from loss of sales due to stock-outs are simply staggering.

Secondary costs of stock-outs

In addition to losing the customer at the moment of truth there are other less obvious costs for brands.  

Loss of brand loyalists 

As outlined above, the most direct loss from a stock-out is missing out on the sale of that specific product. According to one global study, when a product is out of stock 9% of consumers will simply not purchase that item. But the even greater risk is that the customer will buy a competitor product. 26% of customers will switch brands if they can’t find or buy your product easily. 

This swap is extremely costly if you consider the lifetime value of the customer if they decide to opt for a competitor instead. The cost of losing a lifelong customer is particularly high compared to brick and mortar sales as many online shoppers  ‘remember carts’ and  repeat the same purchases again.  

Reputational damage

When an item is out of stock, customers are left feeling frustrated and annoyed. This can damage brand trust and reputation, with both the customer and the retailer- especially if stock-outs are a frequent occurrence.

Brand Visibility

When you are out of stock e-retailers may:

• Unpublish your product page, which will remove your product from search results and navigation, potentially harming your ‘popularity rank on the site’.
• Redirect your out-of-stock product page to a competitor's page.
• Show an ‘out of stock’ notification. 
• Remove the ‘Buy Box’.

When your brand is no longer visible on the page, you also impact brand awareness – over time this can damage brand loyalty and equity (out of sight- out of mind).  It can also suppress your search ranking, even after the product is back in stock, effectively erasing all your hard work on SEO and SEM. So the faster you can get back in stock, the faster you recover your rank.

Poor search engine rank

A unique consideration for brands is the impact of stock-outs on page rank or search rank within the ecommerce retail channel.This is particularly relevant if retailers manage out of stocks by removing your product page entirely from the website.   

Also, customers who land on your product page to find it out of stock, may bounce quickly. This could harm your  search ranking or cause dissatisfied customers to leave negative reviews, (once again impacting your page ranking as well as reputation).

Wasted advertising dollars

This year US CPG companies are estimated to spend roughly $19.40 billion in digital and online promotions. This is a significant investment that can become a sunk cost if customers can’t ultimately purchase the product due to poor availability or stock problems.

What can you do? 

Identify and fix stock-outs quickly

If a stock-out happens then you want to be identified immediately, not several days or a week later. You need a reporting tool that can flag out of stock channels and store locations to you in close to real time. 

To learn more about how Upshelf can help you uncover your blindspots, flag stock-outs and boost online sales contact us for a demo or see if you are eligible for a free trial.