inventory management e-commerce

HOW PRODUCT AVAILABILITY DISRUPTS ONLINE BUSINESS

By Aad Smits

Over the past years, an increasing number of e-commerce businesses have been founded in Australia. Online shopping is booming and in its 2018 report, Australian Post stated that by 2020 they expect 1 out of 10 items to be purchased online. But what are the things to focus on in running your online business?

Changing online shopping

The way people shop online is changing; the use of mobile devices to purchase goods online has increased significantly over the past few years. Today, one out of five online purchases is done via a mobile device instead of a computer or laptop and is likely to further increase in the future.

This, of course, has an influence on the way the market should be approached and how marketing activities should be organised. But online shopping also affects a company’s supply chain design. In traditional retail, stock used to be decentralised in stores so it was always close to the customer, whereas nowadays it pays off to make well-considered decisions where to keep your stock. If you centralise the inventory, e-commerce allows you to be more agile and serve more customers. You don’t have to keep every product in every store, but the long tail can only be offered in the online assortment. If a customer requires an item in a store, an omnichannel strategy can help to get the product delivered at the customer’s place of preference, without having the risk of stocking the item in every store and not selling it.

Effect of stock-outs

However, with the increasing importance of e-commerce and omnichannel, a clear online strategy is crucial to create a good and consistent online customer journey. Ever thought about the consequence if a product is not available in your online store? A recent study of SAP Customer Experience (2018) has shown that 57% of the Australian shoppers abandon their shopping cart without proceeding with the order. In almost a third (32%) of the cases, consumers give up on their carts due to out-of-stock items. This shows that consumers, in general, are not willing to wait if a product is not available.

How to improve product availability?

First, it is recommended to determine the right target service levels for each item. How much does each product contribute to sales, how many different customers order the product, and so how important is it to have this item available online? Obviously, important items should have higher service levels, leading to higher safety stocks.

Should the item stock out, think of what would be the best strategy to deal with this. Would it make sense to not show the item online anymore until the new stock comes in, so the customer cannot order the item that is currently not available? Maybe, but this can only be done for non-branded items from the long tail. If your A-item is not even visible online, there is a chance of losing market share. And if an item is temporarily not available, it makes sense for consumers to know when they can expect the product to be back in stock. So, another option is to show the estimated time of arrival, this will pay off since consumers will know when they can expect the product.

Dynamic pricing

Some companies use dynamic pricing to differentiate between items where product availability is scarce, and where they have excess stocks. For items that tend to run out of stock, a slightly higher price is applied to increase the margin and reduce the chance of running out of stock before the next batch arrives. For items with excess stock, a lower price is applied for promotional clearance. In this way, the stock level is a co-decision factor for pricing.

Speaking about price, according to the same SAP Customer Experience research, 53% of Australian consumers online stated that discounts and promotions succeed in nudging them to complete a purchase. Perhaps as expected, but this shows that both product availability and price are key factors in the consumers’ perception in online shopping, and eventually determine if they proceed with their online purchase.

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