From Amazon to Shopify and beyond, no matter which corner of commerce you operate in, you lose sales when your products go out of stock.
Every year, retailers lose an estimated $1.8 trillion due to inventory mismanagement. That’s roughly 7.8% of total global retail sales.
At Flieber, our team has onboarded over 3 million SKUs. We’ve found that the number for this subset of products is even more drastic: our calculations point to an average of 11.2% in lost sales.
To understand the impact of these numbers on your own business, let me tell you the tale of Moe and Joe.
You’ll see how two retailers with the same exact business can get radically different margins based on where they place their focus.
Moe is an Amazon seller who's addicted to getting more sales. He's proud that he’s reached 8-figures and has no problem letting everyone know about his top-line growth. He follows all the tips and hacks from the Amazon seller gurus and his main objective is to keep increasing sales.
Joe, on the other hand, sells on Shopify, Amazon and through some wholesale partners. He knows the importance of top-line sales, but what really matters to him is his bottom line. He does everything he can to improve his operations so that his business can generate as much profit as possible.
We gave Moe and Joe the same exact company and gave each $500,000 in cash to be spent in two years. Let's see how each of them invests this money and what results they achieve.
The company we're handing to Moe and Joe is currently selling $10M per year. But it could be selling $11.2M if it wasn't for their 11.2% in lost sales.
In other words, this company is spending enough in ads and deploying a sufficiently aggressive pricing strategy to generate more sales than it's actually selling, due to inventory inefficiencies like stockouts.
We’ve simplified the costs for the sake of this exercise, but let’s take a closer look at how a gap of $1.2M+ in lost sales can fly under the radar.
The table below shows the full scenario:
Note that the company is spending more than $1.3M in advertising, enough to generate $11.2M in sales. But the 11.2% in lost sales makes the actual sales only $10M.
The 12% advertising spend is actually 13.5%, since a big chunk of this investment was in vain due to the lost sales. After all costs, this company with $10,000,000 in annual sales saw a net profit of $1,848,649 (18.5%).
We asked Moe and Joe to tell us what they would do next.
As we said above, Moe is obsessed with increasing top-line sales. He learned from his Amazon gurus that the main thing is to increase ad spend. Knowing that he has two years to generate the best results, he splits the capital into two equal $250,000 parts.
This is what happens in year 1:
Moe's actual sales went from $10M to $11.9M, which represents 18.5% growth. His profit went from $1,848,649 to $2,190,649, an increase of $342,000. Moe's plan was a big success.
But when Moe measured his ad spend against his actual sales, he couldn’t see how much more sales that investment could have generated if there were no operational constraints like stockouts.
Moe’s lost sales grew proportionately with his actual sales. Now, Moe is leaving $1,494,595 on the table.
That's a lot of money. But he doesn't even know that, since he has no visibility to this type of data.
Now let's look at what Joe did in his first year.
In the past, Joe was a lot like Moe. But as he matured as a brand owner, he noticed that leaving money on the table through lost sales has big consequences for his profitability.
The first thing Joe does is sit down and look at where he’s losing sales. When he sees 11.2%, he goes straight into damage control. For Joe, pushing for top-line growth without full control over operations would be like trying to dump water from a boat with a hole in the bottom. Reducing lost sales becomes his main focus.
Joe knows that he needs better visibility into his sales and inventory data. He decides to invest $10,000 in an annual subscription for an inventory planning system that helps him see exactly where he’s losing sales and when to replenish.
The "Fees & Others" line of his financial statement has increased, but he knows better data will help him make decisions that grow his bottom line.
His relentless focus on taking control of the situation pays off. In his first year, Joe is able to reduce the lost sales by 50%. And with a high-visibility inventory planning system, he knows it’s possible.
These are his results:
By making this reduction, Joe's actual sales increased from $10M to $10.6M, which is less than Moe's $11M figure. Although his profit margin got much better (increasing from 18.5% to 19.3%), he still generated $150,198 less in profits than Moe.
When they saw the closing results of year one, Moe celebrated the victory. But Joe knew that his long term plan would pay off.
In year two, Moe continued with his plan of driving more top-line sales.
He not only deployed the extra $250,000 in cash available, he also funneled the full $342,000 in extra profit straight into advertising.
These were his results:
Moe achieved incredible sales growth of 21.4% in year two and reached $2,658,505 in net profit, which is over $800,000 more than the profit the company had when he took over. Go, Moe!
Now, let’s see how Joe’s doing.
With his processes adjusted and the right systems in place, now it was time for Joe to focus on growth while maintaining tight control over his operations.
In year two, Joe invested in advertising the rest of his initial cash (discounting the annual subscription of his data system) plus the $191,802 in extra profit from year one.
He was also able to keep improving his control over operations, resulting in even lower lost sales.
These were his results:
Combining top line growth (sales from extra ad spend) and bottom line growth (profit from more efficient operations) really paid off for Joe.
He was able to generate a whopping net profit of over $3.1M, with a profit margin of 19.3%.
Best of all, Joe now has a much healthier company that can continue growing in the future.
The winner is clear, but Moe is astonished by the results.
How could Joe have spent almost 5% less in advertising and still generate higher sales and much higher margins?
Here’s the final comparison of Moe's and Joe's performance:
Moe realized the Amazon gurus were wrong. Yes, top-line sales is important, but what makes or breaks a business is inventory. This was a hard lesson to learn, but it opened Moe's eyes. Now he's ready to invest in better operations.
As for Joe, he's still not happy with the 4.2% in lost sales and continues to relentlessly improve his operations. His main objective is to generate the highest possible margin with the least possible capital requirements. With the right systems and processes, he knows he can achieve that.
Whether you run your business on Amazon, Shopify, or any other channel, there’s a lot you could do with an extra 11% in sales. But in order to solve the problem of lost sales, you’ve got to be able to see it first.
With better visibility into your sales and inventory data, you can see all the variables impacting your growth, including your current stock, on order stock, sales forecast, intermediate stockouts, and ideal points of replenishment.
Like Joe, you can identify lost sales before they become a problem and build an operationally efficient business that grows your bottom line.
Try the inventory algorithm that’s been tested on over 3 million SKUs. Learn more with your free trial of Flieber.