This post is by Dani Avitz, an ecommerce expert & COO of Algopix.
In the world of ecommerce, not every product that a seller sources will actually sell. Sure, there are those products that seem to have never-ending demand despite the season and asking price. But, the fact is that around 20% of a seller’s inventory will become no-sells, or what is more appropriately known as overstock or dead stock.
Why does overstocking happen? The answer is usually two-fold, consisting of inventory purchases that were not based on sufficient market or product data; and inventory purchases that were driven by the wrong data – with the latter often being the worst of the two.
It doesn’t have to be this way.
Why does overstocking matter?
Before we talk about avoiding excess stock, let’s look at the impact unsold stock has on a seller’s business. There are several factors that should be considered.
The first thing that comes to mind is the money spent on that inventory. That’s capital you have tied up in goods that may never see the light of day. Next, you have the cost of storing those items. Warehouse space is not only necessary in most cases, but can quickly become costly. Finally, there’s the time and energy you’re expending on marketing those products – both of which you could be dedicating to growing your ecommerce business.
Adding to these financial stress points are the ancillary costs that many desperate sellers run into. These are things like consultancy fees paid to “overstock specialists” who claim to have the magic formula for helping you sell those seemingly unsellable items.
Essentially, the money, time and energy that you wasted babysitting bad inventory could have been spent pursuing better ecommerce opportunities. This means that overstock can quickly become a major problem.
Avoiding dead stock
To help you understand what it takes to avoid, or at least reduce, the amount of dead stock in your inventory, consider the three essential points below. One or two of these may seem outside the box, but each should have a significant impact on the way you approach your dead stock.
1. Abandon gut feelings
This one may seem like a no-brainer, but a lot of ecommerce sellers actually make purchasing decisions based on gut feelings. Literally, if they feel like a product would sell well, then they purchase however many their gut leads them to believe they can move.
But, as you’ve probably guessed, the outcomes of those sourcing decisions made by gut feeling are typically much worse than those driven by data.
So, if you tend to base sourcing decisions on gut feelings and past successes, you’d be hard-pressed to find a quicker way to waste money. Take a closer look at this type of decision-making, and you’ll discover just how costly it can be.
2. Don’t bet it all on historical data
Historical data will only take you so far. And, quite honestly, the historical data for many products is misleading.
Don’t get me wrong, it should always be data that leads your understanding of how well a product is expected to perform. However, historical data works well for consistent bestsellers, and not so well for products with fluctuating demand patterns.
3. Double-check and triple-check recommendations
Suppliers have one goal: to supply as many products to as many sellers as possible. Suppliers are far more worried about being able to sell products to you, than they are about you being able to sell those products to your customers.
So, anytime you receive recommendations from your supplier, you should question it as if it came from a competitor. Why? Because that supplier is likely to be recommending the same products to you and all the other sellers that they do business with. Plus, it is unlikely that those recommendations are based on any relevant market or research data.
How do I source the right products?
Obviously, sourcing isn’t easy.
To get it right, sellers generally have to review thousands of product lists, examine existing inventories, and conduct in-depth market and product research.
But in some cases, there’s barely enough time to make a qualified decision on which products will sell, and which won’t. So, what do you do when that happens?
The answer is that you devote your time and energy to the right data – data that can guide your sourcing and significantly reduce overstocking. Once you have dead stock, there’s little you can do. The key is to avoid it in the first place.
Next, I will explain the specific data that frequently impacts a seller’s ability to trade their stock successfully. There are a number of data points that influence sales velocity, including market demand and the cost price. We have found that 67% of the products researched by our users are low in demand, priced too high by the supplier, or both. Most of the products that are available, are to be avoided!
In my experience, there are three primary areas that ecommerce sellers should be concerned with when sourcing products.
1. Market demand
I can’t stress enough the importance of examining the demand for your products across different markets and different platforms, such as eBay vs Amazon.
Here’s an example of the market price for the same product across eight different sites. Prices vary, but so do competition and demand.
Having a high market price is only attractive is there is also sufficient demand. It may actually be better to sell in a more competitive market with lower prices, but much higher demand. So, not only is market research wise, it’s essential to your overall goal of moving products and increasing profits.
But first, become intimately familiar with your home market. This is where a lot of sellers are able to position themselves for success. Just following the biggest marketplaces – solely because they are the biggest – is a plan for failure.
Then examine data from global markets. Doing so can potentially introduce you to lucrative selling opportunities and global expansion options. Sellers sometimes find that their dead stock products can yield great profits overseas, even after taxes and international shipping costs are deducted.
However, if you are not setup to sell globally don’t let such data discourage you from further analysis of a product’s performance in local markets.
In theory, competition is easy to judge. But, in practice, analyzing one’s competition is far more complex than most sellers would like to believe. One reason for this is because you have more competition than you may realize. Not only are other legitimate sellers your competition, but so are scammers.
Yes, scammers. For example, there was a spike recently in bogus sellers offering popular products at very low prices, but never fulfilling the orders. This drove down market prices for legitimate sellers too. So, if you source one of these products, make sure you have the reputation and ratings to counteract any potentially negative impact that comes with it.
I am still surprised by how many sellers refuse to thoroughly analyze their competition. Consistent competitor analysis will save you from choosing products with supply and demand data that is dangerously skewed – leaving you to make targeted, data-driven purchasing decisions.
It’s imperative that you know your competitors. Not only could you be competing with legitimate sellers, but also manufacturers who, with the growth in direct-to-consumer ecommerce, often have their own eBay storefronts. And, should this be the case, trying to compete with them will quickly prove futile.
The same holds true for products that you sell on Amazon. If Amazon is the main seller then what kind of competitive edge could you possibly secure? The answer is none. Unless, of course, there is some sort of issue with keeping the product in stock. But, generally, the risk is too high to make it worthwhile.
If you’ve been selling for a while, you know how frustrating and time-consuming calculating marketplace fees and shipping and handling (S&H) costs can be. When you add the different shipping options and cost variables for international freight into the mix, you have yourself one heck of a headache.
But, having an accurate understanding of your marketplace and logistics costs is critical to your sourcing decisions. Once you realize how significant it is, you’ll never complain about this step again.
Without an accurate understanding of costs, you run the risk of seeing no profit at all on what otherwise looked like a perfect inventory decision.
The same goes for verifying recommended prices. One consensus dominating the contemporary ecommerce landscape is that it’s okay to trust the manufacturer’s suggested retail price (MSRP).
This, my friend, is a huge no-no.
One of your foremost objectives prior to making any type of purchasing decision should be to verify and re-verify recommended prices – especially for tech and similar goods.
Products such as video games tend to drop in price mere weeks after their release. This is also the case with flagship phones – products that were once able to hold their launch prices for several months.
It makes sense that as a seller, your number one goal is to sell all of your inventory. I mean, what other point is there to being in ecommerce, right?
For most sellers, sitting on inventory that won’t move not only equates to decreased sales, but could have a significant impact on their livelihood.
But, before you start buying every product a supplier recommends to you and listing them on every marketplace hoping to get lucky, consider what data really matters. What you don’t want is a reckless ecommerce strategy that is only good for giving rise to unsold inventory. By blindly buying and listing products, you’re actually digging yourself deeper into a rut that will be harder to get out of later.
My best advice is to slow down and lay out all of the data in front of you. Does the data tell you everything you need to know to make the best purchasing decisions? If it doesn’t, or you aren’t entirely sure, continue with your product and market research until you have exactly what you need to make a qualified decision.
And, if you already have data for your items but still aren’t seeing any movement for certain products in your inventory, I would advise that you start the process from scratch. The data you have might not be entirely accurate, or it might be outdated. Both of these factors will result in inaccurate interpretations – and therefore decisions – being made on your part.
More than anything else, do your best to stay patient. Some sales may not come as fast as you’d like them to, but if you approach this process the correct way, they will surely come.
This post was by Dani Avitz, an ecommerce expert & COO of Algopix, a product market research tool for eBay and Amazon sellers. The data used in this article is available from Algopix.
Wow thank you so much Dani
Such an amazing informative and factual article.