Have you ever had a customer ready to hit “buy” … only to find the item out of stock? Yikes.
That’s a stockout, and it’s quietly eating away at your e-commerce profits.
Retailers lose about $1.1 million per year due to stockouts. Another staggering fact? In 2023 alone, according to IHL Group, inventory distortion (including stockouts and overstocks) cost retailers a whopping $1.8 trillion. To put that in perspective a little bit, that’s roughly equivalent to Brazil’s entire GDP!
So, what can you do about it?
Let’s break down what stockouts really cost, why they happen, and how you can avoid them. Because understanding the impact could be the key to turning lost sales into lasting growth.
A look at the topics we will be covering:
- What is a stockout?
- The true financial impact of stockouts
- The primary causes of stockouts
- Strategies to prevent costly stockouts
What exactly is a stockout?
A stockout occurs when an item your customers want to purchase is unavailable due to depleted inventory. It’s that dreaded “out of stock” message that appears when a shopper is ready to buy. While sometimes unavoidable, stockouts can stem from preventable issues like poor inventory planning, supply chain disruptions, or inaccurate demand forecasting.
For e-commerce businesses, stockouts can represent more than just a temporary inability to fulfill orders. They can signal operational inefficiencies that can damage your brand’s reputation and customer relationships (hey, why do these guys not have anything in stock?? I’m tired of this ... I am going to go to their competitor instead.)
You see, when shoppers encounter empty virtual shelves, their disappointment often translates into immediate action. They are simply going to click away and head over to your competitors.
But … why? Why can’t they just wait until you get the item back in stock?
Interestingly, the psychology behind customer reactions to stockouts is particularly concerning. Research shows that approximately 70% of consumers switch brands or retailers when they can’t find their desired product in stock.
In fact, only a loyal 13% will wait for restocking.
This consumer behavior pattern means that each stockout incident potentially represents not just a lost sale but a lost customer relationship.
In today’s instant-gratification marketplace, where the “Amazon effect” has conditioned shoppers to expect immediate availability, stockouts can be particularly damaging. It’s the wild west out there – and not many customers are loyal to specific brands.
Therefore, customers have less patience than ever for inventory issues, making effective stockout management a critical component of e-commerce success.
The true financial impact of stockouts
The financial consequences of stockouts extend far beyond obvious lost sales. When calculating the true cost of stockouts, you need to consider direct and indirect expenses affecting your bottom line.
Let’s break down the direct costs first, shall we?
Every time a product is unavailable, you lose the immediate revenue from that potential sale. But that’s just the beginning …
If you need to expedite shipping to restock quickly, you’ll face premium freight charges.
Emergency orders from suppliers often come with higher per-costs, further eroding your margins. These direct expenses add up quickly, especially during high-demand periods.
The indirect costs, however, can be even more significant in the long run (so rude, I know).
Customer dissatisfaction leads to decreased loyalty, potentially resulting in lifetime value losses that far exceed the initial missed sale. According to research, more than half of global e-shoppers reported being unable to purchase products due to stockouts. Each of these experiences damages your brand reputation and may require additional marketing spending to repair.
Wondering what your stockout costs might be? I got you. Here’s a simple formula to help you calculate your basic stockout costs:
For example, if your premium product sells 50 units daily at $75 each, and you’re out of stock for 4 days …
- Lost sales: 4 days x 50 units x $75 = $15,000
- Add emergency restocking costs ($$) and expedited shipping ($$$)
- Total stockout cost = $15,00 + ($$) + ($$$)
In the above example, you can see how one product being unavailable for less than a week can really have a significant financial impact. And remember: this calculation doesn’t even account for the long-term impact on customer loyalty and future sales.
The culprits:
The primary causes of inventory stockouts
Understanding why stockouts occur is the first step toward preventing them. Let’s explore the four main culprits behind those frustrating “out of stock” situations.
Inaccurate demand forecasting
Of course, no one can 100% predict the future, but we can make some decent educated guesses that come pretty close.
Poor prediction of future demand stands as the leading cause of stockouts, accounting for approximately 70-75% of all out-of-stock situations. Therefore, when forecasting misses the mark, you’re essentially flying blind with your inventory planning. Many e-commerce businesses still rely on basic spreadsheets, which simply can’t account for the complex variables affecting modern consumer behavior.
Without the proper analytics, your inventory decisions become educated guesses … at best.
Supply chain disruptions
Supply chain issues can create some of the most prolonged and challenging stockout situations. Just like all of us, the global supply chain can be vulnerable. The global supply chain can experience disruptions from various sources like natural disasters, political instability, labor disputes, transportation bottlenecks – and tariffs. All can prevent products from reaching your warehouse.
This is where building resilience through supplier diversification and improved visibility across your supply network is essential for minimizing these risks.
Inventory management failures
Sometimes, the problem is not external but stems from internal processes. For example, inefficient inventory tracking, poor warehouse organization, and manual errors can all lead to phantom inventory. No, not in a ghost story sense, but that products appear available in your system but aren’t on your shelves. Without accurate, real-time inventory data, you might be selling products you don’t physically have.
These management failures often occur when businesses outgrow the current way they handle inventory management (spreadsheets, unscalable systems, etc.)
As your e-commerce operation scales, the complexity of inventory management increases exponentially, requiring a system that can grow with you and won’t hold you back.
Cash flow constraints
Limited working capital can also force difficult inventory decisions. When cash is tight, decisions need to be made to delay reordering or reduce order quantities below optimal levels, increasing stockout risks. This can create a dangerous cycle: stockouts lead to lost sales, further restricting cash flow and leading to more inventory constraints.
For growing e-commerce businesses, this cash flow challenge can be particularly acute during seasonal demand spikes when larger inventory investments are needed precisely when financial resources might be stretched thin.
Strategies to prevent costly stockouts
Now that we know the culprits of stockouts, let’s prevent them. Here are some practical approaches to keep your virtual shelves stocked and your customers happy.
Optimize your safety stock strategy
Safety stock serves as your buffer against unexpected demand spikes or supply delays, but calculating the optimal amount is a bit of a tightrope-walking act. Too little safety stock leaves you vulnerable to stockouts. Too much stock ties up capital and warehouse space unnecessarily.
A dynamic safety stock strategy adjusts inventory buffers based on factors like demand volatility, lead time reliability, and product importance. High-value, fast-moving products with stable demand might need minimal safety stock, while items with erratic sales patterns or critical importance to customer satisfaction might warrant larger buffers.
Review and adjust your safety stock levels regularly as market conditions and supplier performance change. For example, temporarily increasing safety stock for featured products during peak seasons or promotional periods can provide additional protection when stockouts are the most damaging.
Diversify your supplier network
Relying on a single source for key products creates dangerous vulnerability in your supply chain. Cultivate relationships with multiple suppliers for critical items, even if secondary sources have slightly higher costs. The premium is essentially insurance against stockouts or any “uh oh” moments.
When evaluating potential suppliers, consider not just price but reliability, quality consistency, and flexibility during demand fluctuations. Geographic diversification also matters – suppliers in different regions provide protection against localized disruptions like weather events, regional transportation issues, and recent tariffs.
Another helpful tip is to maintain open communication with your supplier network about upcoming promotions or expected demand changes. The more visibility your suppliers have into your needs, the better they can prepare to support your inventory requirements.
Implement real-time inventory tracking
You can’t manage what you can’t measure accurately. Real-time inventory visibility across all locations, platforms, and sales channels is fundamental to preventing stockouts. Modern inventory management systems can track stock levels continuously, automatically triggering reorder alerts when inventory approaches predetermined thresholds.
Regular cycle counting (the process of systematically verifying portions of your inventory on a rotating schedule) helps maintain accuracy between full physical inventories. This practice identifies discrepancies early and before they can result in stockout situations.
Barcode systems can also contribute to inventory accuracy. These technologies eliminate the discrepancies between physical inventory and system records that often lead to unexpected stockouts.
How Zenventory can help
Managing inventory effectively doesn’t have to be a constant struggle. Zenventory offers a comprehensive solution designed specifically to help e-commerce businesses prevent costly stockouts while optimizing inventory levels.
Our platform provides real-time inventory visibility across all your sales channels, platforms, and warehouses, eliminating the information gaps that often lead to stockout situations.
Don’t let stockout drain your profits and drive customers into your competitors’ arms. With Zenventory, you can transform inventory management from a constant challenge into a strategic advantage for your e-commerce business.
Schedule your personalized demo to see how our solution can help you prevent stockouts and boost your profitability.
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