Most stockout reports count one thing: units you could have sold while the product was out. The best measurement of what else goes missing comes from a large field test at a mail-order catalog, and it’s the study every inventory decision in this guide leans on.

The test

Eric Anderson, Gavan Fitzsimons and Duncan Simester worked with a catalog selling bedding and home accessories. For five weeks they tracked 22,921 customers and what happened when an item they ordered was out of stock, then followed the same customers for 13 months Published. Three findings matter for a DTC brand.

• The item itself. The catalog earned revenue on 86% of ordered items that were in stock, and 62% of those that were out of stock. The rest never became revenue.
• The rest of the order. When one item was out of stock, the other items in the same order converted at 71.2% instead of 83.1%. A stockout on one product loses part of the basket around it.
• The next year. Customers whose ordered items were all out of stock bought about 22% less over the following 13 months than customers who had no stockouts.

PublishedAnderson, Fitzsimons and Simester, “Measuring and Mitigating the Costs of Stockouts,” Management Science, 2006.

The authors put the short-run cost of a stockout at $13.13 per item, against the $25.96 the catalog expected to earn from an item in stock, and found long-run profits fell by a further $9.56 Published. So in their data the future cost was about 42% of the total, and a report that counts only the lost sale misses it Derived ($9.56 of $22.69).

A stockout report that counts only lost units measures the cheaper half of the damage.

Substitution or defection

When a shopper meets a stockout, there are only a few things they can do. Daniel Corsten and Thomas Gruen, who studied out-of-stocks in grocery stores around the world, list five: buy the same brand in another size or variety, buy another brand, wait, buy the item somewhere else, or not buy at all Published. A supermarket keeps the sale in the first two cases. A DTC brand keeps it only in the first and the third, because “another brand” and “somewhere else” both mean a competitor.

That’s why the catalog finding on substitution matters. Customers there had alternatives in the same catalog, and “the level of substitution was negligible” Published. People who order a specific product mostly want that product. Don’t count on substitution happening by itself; the flows in chapter 4 exist to make it more likely.

Who gets hit

One more finding changes where to look. The study saw “little evidence that the impact of a stockout varies across customers,” but found that “customers who purchase frequently from a firm are the most likely to experience a stockout” Published. The damage per customer was about the same. The exposure wasn’t. Frequent buyers simply meet more stockouts, because they place more orders.

A later study at an online grocer, by Xiaoqing Jing and Michael Lewis, found that prioritizing inventory by customers’ transaction histories and basket contents “can lead to large increases in contribution” Published. Decide what to protect by who’s buying, not only by how much sells.

One caution: the catalog sold bedding, not a consumable on a reorder cycle, and a customer who reorders the same serum every six weeks may be more forgiving, or less. The direction of the findings is solid. The size in your store is something to measure, and Appendix A shows how.

Do this

• Pick your worst stockout of the past year. Pull the customers who had bought that product in the 180 days before it ran out, and a comparison group who bought a similar product that stayed in stock. Compare how many of each placed any order in the 90 days after. The gap is your own version of the 22%.