What is a Stockout and How to Avoid It in E-commerce?

No amount of a sale you make is relevant if the product does not exist in your physical domain. A sudden inventory shortage can turn things upside down and you’ve inadvertently got yourself a disappointed customer.  

Across the US retail market, store managers handle stockout occurrences in various ways and strive to prevent an ongoing systemic deficiency. Nevertheless, stockouts are a serious problem for many vendors throughout the United States. It’s fair to say it’s a veritable retail epidemic. 

So, let’s look at common examples of stockouts, their consequences, and the most practical solutions for how to prevent stockouts in advance. 

What is a Stockout?

The meaning of stockout or inventory stockout is having an item listed as ‘available’ for sale in your store but not having it available or in saleable condition. Being out-of-stock (OOS) on one product or more is a very common problem for online retailers and physical stores alike. 

It’s fair to say that virtually all customers have experienced that situation. You can probably recall at least a single time when you ordered something online and were disappointed to get a follow-up call or message with an apologetic out-of-stock notification.

In so many cases, the frustrating inaccessibility of an item to a shopper is not due to shortages of material or manpower at the manufacturing end of the commercial system. It’s due merely to a failure to monitor and maintain inventory levels at the retailing end. 

Causes of Stockouts

With the many moving parts in the process of bringing a product for sale to your company’s shipping warehouse, of course, there will be occasional issues. Along the way are virtually innumerable external and internal potential causes and contributors to causes of stockouts on a product sold by a retailer. So, even if you do everything right, at some point, your business will face a stockout. Some of the most likely reasons for a shortage are:

• Ineffective inventory management
• Inadequate forecasting
• Disrupted supply chain
• High demand
• Warehouse staff shortages 
• Damaged or outdated stock

As your unsuspecting customers are checking out products from their shopping carts, they are unaware of the reasons why they will not be able to get the items they want to buy from you. Their key interest is in where to turn the item they want or need to purchase. So, they’ll move on quickly to the most viable alternative. 

Your responsibility is to communicate the information about the shortage, delivery delay, and compensatory actions you’re prepared to take (discount for waiting, alternative product, etc.).  

Consequences of a Stockout

In a Harvard Business Review consumer study, up to 25% of survey respondents said they just don’t buy anything in the event of a stockout. Up to 43% said they would go to a different store to buy the item. The rest said they would buy an alternative instead (a different size, model, color, an option with other features, etc.) The researchers determined that large retailers can incur many millions of dollars in annual losses due to stockouts. 

The retail market is, of course, intensely competitive. The merchants who best manage their inventory management systems gain a critical edge over those with less consistent track records. One stockout incident can negatively impact the customer experience, damaging the retailer’s record of reliability. If stockouts happen frequently, the problem can threaten the continued success of an online store. 

What is Stockout's Cost?

The retailer who lets down the customer can expect to begin to fade from favor in contrast to the competitor who came through for the shopper with a rapid turnaround in a pinch. But that’s not all of it. There are actual costs involved in the event of the needed product’s unavailability and even more costs if a customer places an order for an out-of-stock item. 

Some of those stockout costs include:

• Cost of lost sale – Aside from presenting an important lesson on what not to do, losing a sale to a competitor always carries broader negative implications for a retailer’s current margins and progress toward future goals.
• Cost of lost customer – The cost of locating and onboarding new customers is believed to be around 3 times the cost of retaining current customers.
• Cost of carrying unsold goods – When an item offered at a seasonal sale price leads to a stockout, that naturally diminishes the relevance of a promotional discount that was intended to drive up sales. After multiple customers are confronted with the stockout, a retailer, especially a small business with lower stock turnover, may incur problematically prolonged storage costs and space issues.
• Cost of brand damage – Loss of brand value can be difficult to precisely quantify as it spreads from a negative event. But when left unchecked, it can ultimately lead to the failure of a business.