For any successful retailer, optimizing operations and inventory must be a top priority to stay competitive. In countries with cutting edge e-commerce competition and existing third party pricing comparison websites, your customers can quickly compare offers between competing e-commerce stores.
For example, when a customers finds an item on your store, it might take just a couple of seconds to check prices and availability of same item on other e-commerce stores. Beyond the (store) brand loyalty, most common factors influencing the purchase decision are price, availability, shipping options and up-sell/cross-sell offers.
Stock-outs can impact your store sales and business in multiple ways:
1. Lost sales
If a competing store has the same item available for immediate delivery and customer prefers to receive goods quickly, you might lose a sale even despite your lower item price. With help of price comparison engines, customer can quickly navigate to other e-shops and compare the delivery times.
2. Abandoned carts
A customer might already have other items added to cart, and decides to complete the same multiple-item purchase at another e-shop. An unavailable item might mean you might either need to charge two shipping fees (one for available items, one for the remaining stocked-out item paid when it becomes available), or delivery time for the complete purchase might be too long.
3. A boost for your competitors
When a customer leaves and completes the purchase at one of your competitors due to item's unavailability at your store, you directly support a competing business: by giving your users a reason not to buy from your store.
How to measure impact of stock-outs
Every successful retailer should perform a quantitative analysis of relationship between item availability and product conversion as a starting point for better inventory optimization.
To properly measure the impact of stock-outs and item availability on your conversions or sales, you might setup and perform a specific short-term AB-test:
1. Select test products - select a collection of several higher velocity products, for which you have enough available inventory to cover the full demand expected during the AB-test period. With selecting high velocity products, we can make sure the statistical AB-test will be able to converge in a short amount of time, and you will not lose more sales than necessary for the purpose of testing.
2. Pick test period - select a time period for performing the test. Select a time interval, where other external factors influencing sales of your selected products are controlled and do not change (e.g. several days).
3. Setup page variants - setup two variants of your product pages: control (your page says the product is available) and test (your page says the product is out-of-stock). Since you've only selected well stocked products in Step 1., even your customers purchasing the products using the test page will receive the product quickly (they will only be pleasantly surprised).
4. Run AB-test - run the AB-test. You can either implement the AB-test page variation with help of your IT staff, or you can use a SaaS AB-testing solution such as Optimizely or Visual Website Optimizer. Make sure to implement the testing in a GDPR compatible way, if your customers are from Europe.
5. Evaluate - with test results ready, you can quantitatively evaluate the difference between conversions for the "stocked" page and the "out-of-stock" page. You can further take your test period summary statistics - number of visits, sales, revenues and profits and make a rough estimate by extrapolating the conversion difference to include your overall store sales and revenues.
For example, if you find out the difference between the "stocked" page and the "out-of-stock" page conversions is just 10%, and if your medium velocity products bring a revenue of 5m EUR yearly, while also being out of stock 20% of time, this very coarse back of the hand calculation shows you might be losing ~100k EUR of revenues per year just considering single lost purchases of the medium velocity products while the products are not stocked (and considering the total abandoned cart problem mentioned earlier, your revenue loss due to stock-outs might be much higher).
How many more sales did you achieve with the "stocked" page versus the "out-of stock" page during your AB-test? Let us know.
We hope that you found these thoughts on stock-availability and sale conversions inspiring and that you will successfully perform proper AB-tests to measure the impact of stock availability and stock-outs on your store sales. Directly quantifying the impact of stock-outs on conversions in terms of lost sales and revenues can lead you to improving your inventory planning process and of course ultimately giving your customers more reasons to shop at your e-commerce store.
FutureMargin is a machine intelligence tool for successful e-commerce stores. Using historical store data, FutureMargin uses machine learning to provide daily automatic sale forecasts which can be used to improve your inventory levels. Available integrations: FutureMargin for Shopify and FutureMargin API.