Dead Stock

Predicting demand is difficult, especially after the holiday season. E-commerce businesses face two challenges: maintaining revenue and managing unsold inventory. Much of this inventory is nearing the end of its life cycle and is unlikely to sell. This inventory is referred to as dead stock.

Online stores often try to avoid dead stock rather than prevent it, resulting in lost profit margins or opportunity costs — the difference between the cost of the item and its potential sale price. You may have mentally written off your dead stock, as it sits in a corner of your warehouse collecting dust. However, there is enormous value in dead stock.

Take the hypothetical case of an online bookstore. If this online bookstore had a dead stock of 50 hardcovers, each of which could be sold at US$15.00, the value of this dead stock would be US$750. Multiply this by all the other products no longer moving, and the dead stock across your business could be worth significant money. And that’s just the direct value you could generate from liquidating the dead stock, rather than ignoring it altogether. There’s also the opportunity cost. Your dead stock is taking up shelf space from products that could be selling quicker, generating more profit, and requiring fewer resources to push.

Challenges with Dead Stock

Selling dead stock can be very profitable, but it can be hard to do. There are different causes for dead stock, each with its own challenges. So, it's important to be aware of the problems that can come with each type.

Most of your dead stock will include items that have reached the end of their lifecycle. This includes clothes from last season, electronics that have been replaced by newer models, and fitness products that are no longer trendy.

Stores are only trying to get rid of dead stock rather than preventing it, this prevents them from making money. Online stores often keep slow-moving products without reducing the price, resulting in dead stock and having to sell below cost or write off the product altogether. This not only reduces profits but leads to losses.

To overcome this hurdle, businesses need to be aware of their profit margins. There should be two profit margins to keep track of. One, what your profit margins are now, which few businesses actually know. In a study of sellers using Konigle, we found that 65% do not have their SKUs calculated.

The second is the ideal profit margin for their particular industry. This benchmarking matters. If other electronics retailers are averaging 20% profit margins, you may not want to veer too far away from that when discounting the laptop in order to stay competitive even when you’re selling dead stock.

A related challenge is price elasticity. Even if a seller knows the profit margins of their company and industry, they may not know how to price the dead stock to get it moving. If they do not discount the product enough, it will remain as dead stock. If, on the other hand, they discount too aggressively, the product may sell, but they may have minimized their potential profits. Why sell a laptop at US$800 when it would have sold just as quickly for US$900? When it comes to dead stock, testing price elasticity is difficult, but it is imperative to maximize revenue.

The final challenge with dead stock is the actual selling. When it comes to new products, businesses usually have no shortage of ideas for campaigns, strategies, and tactics to push them. When it comes to dead stock, in contrast, businesses usually draw a blank. In losing excitement for these products, they seem to have lost all their ideas.

Apart from repushing products at the end of their life cycle, sellers need to find a way to prevent their occurrence in the first place. Such is done through careful inventory management, which sellers do not typically have domain expertise in. Most sellers have built experience in their product category and not this aspect of operations, which results in dead stock when forecasting is inaccurate.

Unfortunately, dead stock is not a one-off issue. If businesses don’t find a way to regularly contend with dead stock, it will quite literally pile up. Shrewd sellers will convert these products into cash through management of both sides of the problem: inventory management and dead stock sales.

Overcoming dead stock

Liquidating dead stock

Sellers are hesitant to liquidate their dead stock due to the fear of selling products “at a loss.” Key to overcoming this psychological hurdle is knowing what the profit margins are for different products. While this may seem like common sense, our research has shown that only 35% of SKUs have their costs calculated.

What keeps sellers from knowing how much they make on an item is tedium. The process of calculating profit margins is laborious. A seller will know the cost of various items from a supplier but will find it difficult to distribute associated costs, such as warehousing, across all of them. If a seller is able to calculate this information, encoding this data into their back-end system is time consuming. There are also special use cases, such as dropshipping, where unit prices fluctuate on a regular basis, making profit margins even harder to calculate.

With Konigle’s Inventory Management Tool, sellers can automatically calculate the costs of different SKUs, taking into account currency exchange rates and additional expenses, and therefore determine their profit margin. Using the Konigle Dynamic Pricing Tool, sellers can automatically update costs when supplier prices change; as is the frequent case of dropshipping, the associated cost changes as well.

Calculating your profit margins is an important first step. The next step is hazier: How do you price your dead stock to encourage sales while maximizing profit? Again, if you price too conservatively, it may stay as dead stock, and if you price too aggressively, you may sell the item but lose out on potential profits.

To find the Goldilocks zone where you sell dead stock at the best possible price for your business, you must first understand the product life cycle. Every product, whether it is the latest iPhone or a side table, has a life cycle. It looks like this:

The problem most sellers have is that they keep their prices unchanged, even as demand for a product falls toward the end of its life cycle. If product prices were mapped onto the chart above, it would be a horizontal line from beginning to end.

Such, of course, does not make sense. A seller should not price a product the same a year after it was first released, when demand is significantly less. Apart from the seasonal sales that every seller commonly offers, they also need to get in the habit of lifecycle markdowns. This refers to discounting products in increasing increments as they age, so that they sell even as demand lowers. Visualized on the product life cycle, it would look something like this:

Running lifecycle markdowns manually would be tedious, if not impossible, for stores with thousands of SKUs. Fortunately, lifecycle markdowns can be automated through the Prevent Dead Stock tool within Konigle. The process is simple: You simply decide which products you would like to put through a lifecycle markdown.

After determining your products, you set the parameters for the lifecycle markdown, including the percentage off a product you will offer for each subsequent time period. Sellers can also set a minimum stock for a markdown price to trigger so that you don’t sell products for less than you need to — a previous discount may be strong enough to push these SKUs. This feature helps maximize profit on dead stock.

In addition to using this Prevent Dead Stock feature to schedule lifecycle markdowns, you can also add tags to add these products into certain store collections, such as a clearance collection. This not only helps in making you more money but also saves you a lot of time, otherwise doing boring work.

You should find unique ways to promote items starting their lifecycle markdowns. Frequent appeals for products in this category include value (think of the stores offering Christmas decorations in January to shoppers who want to stock up ahead of time), age (there are some items viewed more preferably with use, such as vintage clothing - if you communicate correctly), or even utility (wood no longer suitable for building could still help the discerning buyer as firewood).

You may even pair these lifecycle markdowns with other sales strategies. You may choose to bundle a dead stock item with a SKU earlier in its product life cycle to increase your basket size

Preventing dead stock

Dead stock does not just spontaneously arise. The most frequent cause of dead stock is actually overstocking — sellers create dead stock by overstocking items. This error is understandable. Businesses, after all, do not want customers to encounter the dreaded “out of stock” status on a product and leave the website. But the business loses money as well with the opposite problem of dead stock. How, then, do sellers contend with having enough stock for customers but not too much?

This balance can be achieved with the Restock Center on Konigle. You can email a purchase order for a given product to a supplier through this module. Upon receiving the shipment, you can then update the status to reflect the quantity received. You can then set a target clearance date for your real stock, which in this case has been set to thirty days.

The seller can then input the lead time it takes to restock the item as well as the minimum stock the business should have at any given time. From there, the Restock Module will advise sellers if they have any dead stock. In the event there is dead stock, the seller can initiate a lifecycle markdown through the Prevent Dead Stock feature.

Further Inspiration for Dealing with Dead Stock

• Fashion designer Valentino used deadstock fabric to promote its new sustainability project.
• Zipper manufacturer YKK launched an exclusive sale focused exclusively on its dead stock.
• Nike’s Air Jordan brand relaunched one of its sneakers, coyly playing on the fact it was just dead stock a generation ago.
• Big Bad Wolf built an entire business around dead stock, setting up pop-up marketplaces for remaindered books around the world.

Takeaways

1. Deadstocks

Predicting demand is tough. Sellers should move to a mindset of preventing dead stock rather than avoiding it. Using tools to run phased markdowns helps prevent dead stock and maximise profit margins.

2. Profit Margin Calculations

Around 65% of products sold online lack cost calculations. This leaves online stores in the dark, significantly hindering their ability to accurately compute profit margins. Konigle's Inventory Tool can make cost calculation easier and more precise.

3. Desperate Discounting

Despite the fact that all products experience a product life cycle, which includes introduction, growth, maturity, and decline, many sellers maintain their prices even when the products are not selling well. As a result, they must eventually either write off the product or sell it at a loss.

4. Price Skimming Tactic

Sellers should gradually reduce the price of products as demand for a product reduces. Konigle's Dead Stock Prevention Tool and the Bulk Price Editor can be used to implement price skimming.

5. Overstocking

Overstocking for "just in case" scenarios is a common cause of dead stock. Konigle's Stock Status Tool can help prevent this by using various variables, such as target clearance, product lead times, and minimum stock, to predict dead stock.