The holiday season of each year is typically when ecommerce stores all over the world make the most amount of revenue. The expected troves of excited shoppers will be punching their keyboards to get the best deal during these Q4 sales events before time (or stock) runs out.
Although Q4’s consumer demand is inflated due to the holiday season, it is fairly straightforward to estimate your inventory needs especially if you’ve been around for a few years and have a good grip on your inventory management practices. Most retailers will look back at last year’s demand spike during the holidays and project a similar spike in demand while accounting for the growth the store has experienced since the last holiday season.
It’s not exactly rocket science, although it can be nuanced. You need to know your lead time and your consumer’s buying patterns along with some internal data on your cash flow situation to know whether you’re restricted by it.
Projecting your inventory needs for the holiday season should show you how much inventory to order, and most importantly, when to order it.
How much inventory should you order:
- Find your expected increase in sales. For this example, let’s say you expect to sell 70% more inventory during the holiday season than you do during regular periods. Historical data can come in very handy here.
- Find how much inventory you order during regular periods. For this example, let’s say you typically order at least 5,000 units of inventory every time you make a purchase order to your supplier.
A simple starting point for how much to order in this example is 70% more than 5,000 units. Resulting in a purchase order of 8,500 units of inventory.
When should you order the new batch of inventory:
- Calculate your lead time. For this example, let’s say your lead time is 60 days from purchase. This means it takes 60 days after purchasing from suppliers for the inventory to get to your warehouse and be reeady for sale.
- Account for any expected supply chain factors like shipping delays caused by other retailer’s making their purchase order at the same time as you. For this example, let’s say we’ve experienced a heavy 10 day delay on our purchase orders.
- Work backwards from the date you know you need to have your inventory by. Your new lead time will help you find when you should order your inventory.
At the end of this example calculation we find that although our lead time is typically 60 days, it is now 70 days due to delays in our supply chain.
So, instead of ordering 5,000 units of inventory 60 days before the holiday season, we need to order 8,500 units of inventory 70 days before the holiday.
Hopefully you already knew this, and I haven’t said anything new yet. Holiday inventory projections are massively important. The last thing in the world that you would ever want is to lose out on sales because you’ve run out of stock from not ordering the proper inventory amount.
The Impact of COVID-19 Changes Everything
Now for the fun part where we get to take a look at how the pandemic has altered all of our plans and we need to rebuild and recalculate everything from scratch…
Here’s what we know for sure:
- 51% of consumers expect to begin holiday shopping earlier than normal this year.
- 76% of consumers intend to purchase more than half of their gifts online.
Some of us ecommerce business owners may have had some adrenaline shoot through our body as we read those stats, but hopefully we are focusing on the opportunity that this brings - not the nightmare that it will be to plan for it.
To put these into context, consumers will be ordering more, and earlier than any year before. Couple that with the fact that we’ve seen a 45% increase in the number of consumers buying things online they never used to buy before covid and we’ve got ourselves a party.
What Does It Mean for Ecommerce Stores?
It means that Q4 is no longer about creating demand, but rather about capitalizing on the avalanche of orders your store is about to receive. To do that, we need to understand how COVID is going to affect your inventory projections.
1. Lead times are going to cause trouble.
An average increase of 20 days has been experienced on supplier lead times however it is likely that your business has had its own lead times delay which you’ve kept track of. The best way to find out how your lead time will be affected will be to ask your supplier and have a chat in preparation for the holiday season. This is an important measure that will help you plan your inventory orders for the 2020 holiday season and Q4 in general.
2. Brands will run out of stock from underestimating how much inventory to order.
Earlier we mentioned that 76% of customers are expecting to make more than half of their gifts online this year during the holiday season. This increased demand for an online purchasing experience is one of the biggest opportunities that the new normal has brought to the ecommerce industry but with it comes inventory troubles.
In Thanksgiving day 2018, merchants lost a heavy $489 million in potential revenue due to running out of stock during Black Friday & Cyber Monday. The lesson here is clear, if you want to avoid losing a healthy chunk of your yearly revenue, make sure you order the right amount of inventory. This is especially true in 2020 due to the massive shift to online sales caused by the pandemic.
It’s a good thing there are affordable credit facilities like an ecommerce line of credit to help you finance the additional inventory you need.
3. Online stores that plan ahead, will win big against their competitors.
Purely from a marketing mechanics standpoint, competition is tough in the online commerce world. A customer can simply type in a competitor's URL to check and compare prices or simply lose interest in your brand. Online consumer loyalty can be fickle in that way. If an online store shows an “out of stock” message, their competitors will win big because a customer has to make minimal effort to switch to a new provider for the product they’re looking for. The thing to keep in mind here is that big mistakes like ordering too little inventory will give your competitors a leg up over you and vice versa.
All that being said, the pandemic has changed many things but the foundation of running an ecommerce business remains the same; selling great products, with a great online experience. Among many other factors, that includes making sure you capitalize on the upcoming holiday season.
Just like Rome, great brands weren’t built in a day. It takes time to create a brand you can be proud of and although we learn from making mistakes, we ultimately have to focus on avoiding them. Part of that effort means being successful when and where it counts, like the 2020 holiday season which is expected to be the biggest ever.
Thinking you might need to buy more inventory than usual to keep up with this year’s covid-fueled online holiday sales season? Check out our affordable line of credit for ecommerce stores.
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