Guides › Cost of stockouts

The five components

1. The immediate lost order

Visible and easy to calculate. Units you would have sold, multiplied by margin. Also the smallest piece.

2. The customer who does not come back

Retail research commonly finds that roughly four in ten shoppers go to a competitor when they meet an out of stock product. Some never return. Since the cost is their lifetime value rather than one order, this is frequently larger than the lost sale by a wide margin.

3. Advertising spent on a page that cannot convert

Campaigns rarely pause themselves when stock hits zero. You keep paying for clicks to a page that cannot take money. This one is pure waste and the easiest to eliminate, provided somebody knows the product went out.

4. Ranking damage

Marketplace and on site search tend to demote unavailable items. The recovery lags the restock, so a few days out of stock can cost weeks of reduced visibility afterwards.

5. The emergency fix

Expedited freight, a partial order at a worse unit price, or staff time spent chasing a supplier. Every one of these is a cost you would not have paid with more warning.

The multiplier

Published analyses of stockout cost commonly put the true figure at somewhere between one and a half and three times the value of the immediate lost sale, with some estimates ranging higher once customer lifetime value is included.

Treat that as an order of magnitude rather than a precise number. It varies enormously with category, margin and how replaceable your product is. A commodity a customer can buy anywhere sits at the high end, because they leave and do not come back. Something distinctive they will wait for sits at the low end.

Industry wide figures for total retail losses run into the trillions annually. Those headline numbers are useful for making the point and useless for your planning. Calculate your own.

Calculating yours

Per product, per day out of stock:

1. Daily units sold × margin per unit. Your direct loss.
2. Add the ad spend still running against that product per day.
3. Add a customer loss estimate. Take the customers who would have bought, assume a share leave permanently and multiply by the difference between their lifetime value and a single order.
4. Add an amortised recovery cost if you expedited anything.
5. Multiply by days out of stock.

The number that actually matters

Notice which input in that example does the damage. Not the daily rate. The twelve days.

You cannot control demand and you have limited control over supplier reliability. You have almost complete control over how long something sits at zero before somebody notices. That is the variable worth attacking. It is also the cheapest one to fix.

A store checking inventory weekly averages several days of undetected stockout. One with alerts averages minutes. On the example above that gap is the difference between 3,000 and roughly nothing.