Stockouts and overstocks are part of the game in eCommerce, but they don’t have to damage your business. According to research, 70% of consumers will switch brands if the product they want is out of stock and 43% will stop purchasing from a brand after just two stockouts. And we’ve all heard the old adage that “every retail business dies cash poor and inventory rich.”
No matter where you sell, inventory distortion can have a very real impact on your cash flow and profitability, but on marketplaces like Amazon and Walmart, that impact is amplified during peak season.
In this article, we’ll share some of the best ways to balance your risks of stockouts vs. overstocks to protect and grow your Q4 profitability.
Ready to optimize your sell-through rates? Learn how to perfect the balance between supply and demand. Watch the full session below!
Common Causes of Q4 Inventory Problems
Inventory issues have a way of creeping in long before you officially run out of stock. One of the earliest symptoms is a drop in rankings as your inventory levels decrease. Data shows that products in positions 1-10 fell in rankings by over 28% after just 1 day out-of-stock on Amazon. After 3 days, rankings fell by 83%, and after 10+ days they fell by close to 150%.
The impact of overstocks can be just as damaging. With too much capital tied up in inventory, there’s little breathing room for new product launches or other high-impact projects.
Here are some of the most common causes of inventory challenges to look out for:
Mistakes in Sales and Inventory Records
What would you do with an extra 8% in Q4 sales? One study found that a whopping 60% of SKUs are impacted by inaccurate inventory records, and that correcting these inaccuracies could lead to a 4-8% increase in sales. Even simple mistakes can cause you to over- or understock. For example, your forecasting process might fail to account for the change in dates for Amazon’s Big Deals Day from 2023 to 2024, resulting in a forecast that includes two separate sales peaks in October for the same event.
Inaccurate Lead Time Calculations
With 60% of merchants reporting lost sales due to stockouts, it’s critical to account for all the variables that go into lead time. The average lead time will vary depending on your niche, but in April 2024, the average global lead time of production materials was 79 days, dramatically lower compared to the 2022 peak of 100 days, but still up significantly from 65 days in 2019. If recent history has taught us anything, it’s that you can’t rely on the global supply chain to get your products on time. To maintain control, retailers need to tighten up their forecasting and work closely with suppliers.
Not Delisting Out-of-stock Items
Even if you decrease your advertising to slow the pace of sales, you may still see a steady stream of orders for a low-in-stock product. To avoid frustrating customers, consider delisting products at risk of stockout. If you already have replenishments on the way, you could also inform customers that you may have a stockout and keep them updated on the status of their order.
Ordering Too Much of The Wrong Thing
As mentioned, not understanding seasonality and other anomalies in your historical Q4 data can lead you to ordering too much of the wrong products. Yes, you do need to hold a certain amount of additional inventory, but if you overdo it on the wrong products, you could get hit with significant storage costs.
Relying Solely on Minimum Order Quantities (MOQs)
If you’re unsure about the sales of each product, you may end up relying solely on MOQs when ordering. For instance, imagine a supplier’s MOQ is 200 units. If you have a product selling at one unit per week and 300 units in stock, you’ll have surplus inventory for more than 5 years. This excess stock can be hard to sell, leading to lower margins and tied-up capital.
How to Balance the Risk of Stockouts vs. Overstocks for Maximum Sales and Profits
To effectively balance your Q4 sales with your target profitability, rankings, fees, pricing and competition all play a role. Let’s dive into some strategies to help you keep it profitable.
1. Identify Slow-moving Products
A common killer of retail companies is making the mistake of overstocking the 80% of the products that only support 20% of revenue. Instead, use the Pareto Principle, to reframe how you think about your product catalog.
Use data to analyze past performance and group products as either: products that sell (i.e., the 20% of products that contribute around 80% of your sales), or products that don’t sell (i.e., the 80% of products that only contribute around 20% of sales). With a clear understanding of each product’s sales patterns, you’ll be able to adjust your inventory to match your sales pace and lead times to avoid over-or under-ordering.
“If you’re an FBA business, you may have a product on the ship that still has a six-week lead time. Amazon doesn’t have eyes on all your lead times, and as a result, we find that established brands tend to have a KPI that is very similar to Sell-Through Rate (STR), but they’ve defined it based on their unique insights into their own lead times,” says Krishna Vemulapali, Chief Product Officer at Trellis during our deep dive on Understanding Sell-Through Rates For Efficient Growth.
Action Steps:
- Identify your demand levers: How can you optimize your advertising, pricing, and promotions to keep sales and inventory aligned? How does each one impact your STR and lead times?
- Understand your price elasticity: How much does the price of each product have to change in order to influence demand? Use the formula: PED = % change in demand / % change in price.
- Use Sponsored Display ads: Cross-sell slow-moving products with faster movers in the event of too much inventory to avoid selling at a loss in the new year.
2. Negotiate with Suppliers
Assess your MOQs within the 80% of slow-moving products and identify those that can be ordered with low MOQs from suppliers. Keep in mind, most suppliers are well aware of the challenges posed by slow-moving inventory.
Many are open to adjusting terms, such as lowering MOQs on certain products or offering the option to cancel a portion of an order for credit towards other products in the event that the full MOQ isn’t needed. Consider asking about grouping products or exploring alternative suppliers who offer more flexible MOQs.
Action Steps:
- Establish clear communication from the start: Suppliers are more likely to collaborate if they understand your expectations. Approach it as a genuine partnership to keep the relationship strong.
- Plan proactively: Aim to keep your purchase orders consistent and avoid last-minute issues like delayed payments. This can help increase your bargaining power and potentially lead to better terms.
- Familiarize yourself with the costs involved: Before entering into supplier negotiations, thoroughly research the costs and variables influencing pricing. Consider making unexpected yet mutually beneficial offers, such as renegotiating payment terms instead of rates, or assisting them in generating new business in exchange for reduced MOQs.
3. Update Your Pricing to Control the Pace of Sales
If you need to slow sales to prevent a stockout, increasing your prices can help — but you’ve got to be careful how you go about it.
Don’t raise prices so high that you hurt your brand’s positioning. Instead, analyze historical data to predict your Q4 demand spikes and make sure you have enough inventory on-hand. As inventory levels decrease, consider gradually increasing your prices until it’s time for the next big sale. To reduce your risk of overstocks, you’ll want to put each of your demand levers to work as you reduce your pricing.
“When you have high supply and low demand, you need to implement full-funnel targeting by entering the market with a lower price. This can be achieved through promotions, discounts, markdowns, or using coupons to attract potential buyers,” explains Ali Babul, Chief Evangelist at Trellis. “By combining these pricing strategies, you aim to generate increased demand by offering an attractive price point. This approach helps you expand your customer base and achieve a balance between supply and demand.”
There’s a reason AI-driven dynamic pricing strategies can lead to a 12% increase in revenue: the optimal price for a product is always changing. With the right combination of tools and strategies, you can determine a healthy range that aligns with your brand goals and margins.
Action Steps:
- Utilize split-testing: Analyze how pricing influences demand and identify optimal surge pricing strategies to manage sales and prevent stockouts.
- Implement rules-based pricing: Establish specific pricing rules based on predefined conditions, such as stock levels. Use dynamic pricing tools to adjust prices in real-time, factoring in elements like demand, inventory, and even competitors’ stock levels.
- Understand when to use dynamic vs. manual repricing strategies (or both): Dynamic pricing tends to work best during periods of fluctuating demand, while rules-based repricing can be more effective for specific goals, like competing for the Buy Box or clearing excess inventory.
- Employ surge pricing: Adjust prices upward during periods of high demand and diminishing stock.
Learn how brands like Nutricost use dynamic pricing to optimize prices on certain days and automatically increase prices to avoid low inventory. Check out our session unpacking The Value of Dynamic Pricing in eCommerce.
4. Adjust Your Advertising
Double-check inventory ahead of planning any kind of sale or promotion. For products with higher ad-based sales, reducing advertising can help you avoid stockouts. If you’re already using self-service or managed DSP, you can start adjusting to account for fluctuating demand.
Don’t forget to consider off-platform channels, like social media, where you may need to pull ads or mentions to control the pace of sales.
Action Steps:
- Set up rules-based bidding: Automatically adjust or pause your advertising when inventory levels are running low.
- Use AI-based bidding: Stay agile and make immediate changes during busy sales seasons like Black Friday. Choose tools that combine inventory and advertising data for quick adjustments.
- Make the most of sponsored ads: Advertise similar products with higher inventory levels alongside promotional pricing. When customers search for sold-out or low-in-stock items, they’ll be more likely to consider purchasing another available option.
5. Know Your Profit Per Session
At the end of the day, even some of the world’s best and biggest brands don’t know how well their ads are actually working. No matter which strategies you use to control your Q4 inventory, you need a metric that can tell you which levers to pull when you need to reduce the risk of stockouts and overstocks.
For this, we recommend using profit per session (pPS) as your north star metric. More than any other KPI, your pPS helps you understand the actual profit generated by a product for a clearer picture of your profitability at the product level.
Used correctly, it can help you identify the right balance of advertising and pricing to increase, decrease, or maintain your sales velocity and inventory levels.
Action Steps:
- Track price sensitivity: Understand how price adjustments can enhance your Click-Through Rate (CTR) and conversion rates, adjusting them based on inventory levels.
- Use pPS with dynamic pricing and bidding: Rapidly adapt your ad and pricing strategies based on your target pPS.
- Evaluate the impact of promotional activities on peak season sales: The right data insights will help you understand when to make adjustments to prevent stockouts and excess inventory.
Maximize Your Q4 Profits with Trellis
With the right strategies in play, you don’t have to accept stockouts and overstocks as “part of the game.” Instead, use your tools and data to step up your advertising game, control your sales pace, and stay a step ahead in the competitive race for Q4 sales.
Remember, adjusting swiftly to market shifts is key — especially during peak season. Start with the actions that you know will drive better results, while keeping a close eye on your inventory risks. By prioritizing ongoing optimization and adaptability, you can position your brand for your best holiday season yet.
Ready to elevate your Q4 strategy? Trellis offers advertising automation, dynamic pricing, and powerful analytics to connect brands with the right customers on Amazon, Walmart, and beyond. Through full-funnel analysis, we help brands of all sizes maximize share of voice, improve catalog productivity, engage repeat customers, and drive revenue growth for sustained online success.
Schedule your personalized demo today to learn how Trellis can help you optimize your profitability this holiday season.
