Managing stock. I’m very passionate about stock management because I believe it is one of the most overlooked yet most important skills for product business owners to learn. So first up I want to share three reasons why you need to focus on your stock management.
1. Big spender
Your stock is your biggest expense and that is reason enough for you to focus on your stock management ongoing. This is what sets product businesses apart from service based businesses. It’s one of the reasons why product businesses can struggle when given more general business advice that’s focused on service based businesses.
Stock takes up a chunk of your sales. When you sell something – you’re either going to have to payout to create it or buy more stock.
So some of money you get from sales goes towards the cost of future stock purchases – and this is the part to focus on – it’s one of those expenses that if you’re not managing it can easily get out of hand.
Be clear on your stock management because it’s the biggest expense in your business.
2. In the driving seat
Managing your stock well will put you in control of your business. How does it feel to have your stock management under control? Well, it will feel like you’ve got your business mapped out in front of you for maybe 12 or even 18 months. You’ll have a really good understanding of how much of your money is tied up in stock and how much you’ll need to be spending on stock in the foreseeable future.
You need to focus on your stock – it is literally make or break for product business owners. It’s no secret that the majority of businesses that fail run into financial problems – usually caused by poor stock control. They basically run out of money, so managing your stock is taking care of a critical element of your business – if you don’t have the biggest expense in your business under control you will run in trouble!
If you want to know more about this, then episode 5 of my podcast is all about stock management.
Now I’ve got your attention! This part of running a retail business is so critical there are 3 clear rules to stick to – I talk through these below. It is a longer blog post than usual but trust me it’s definitely worth the full read.
The Golden Rules of Managing Stock
Golden Rule 1. Order the right amount
As a retail business, your stock is your most valuable asset. Almost certainly, it’s also your biggest expense, and if you look back at where most of your money has gone, your stock will make up the bulk of your expenditure.
Too much stock means too much cash tied up in your business.
As a business, reducing how much stock you are carrying at any one time is crucial to keeping your cash flow healthy.
Imagine that your stock is not product, but a pile of cash. Avoid having too much “cash” sitting around not working in your business. To do this, you’ll need to be actively managing your stock.
Strike a balance
The biggest challenge in retail is working out how much stock to have in your business so that you don’t miss out on sales, while at the same time keeping your stock under control.
It is not an easy balance to strike, and even big retailers that have access to forecasting systems and trained analysts have to manage this really carefully, so don’t feel bad if it doesn’t come easily to you.
How do you work out how much to buy?
One of the most common questions I get asked is how to work out how many of each product to buy.
You’ve identified what products that you want to have and you’re excited to bring them into the business. Now you are at the point where you have to decide how many.
Set a budget
Before you decide on individual quantities for each item, first get clear about how much money you have available to spend on new stock.
In retail businesses, this amount is known as “open to buy” or OTB. Big businesses calculate their OTB by looking at forecast sales and how much stock the business is prepared to carry, but you may make your decision based on the cash you have available to you at the time.
Set yourself a budget – either for each month, or for a whole season. Each product that you buy will come out of this budget, so you’ll need to get clear on your number, and keep it close at hand when you are ordering products to avoid going over.
Working out the quantities
There are three main factors that affect the quantity.
One – how many will you sell on average per week?
If you are re-ordering a product that you already sell, you will be able to just look at past sales history for this information. Ideally, look at a minimum of 4 weeks of sales to get an average weekly sales number.
If you have not sold this item before – what do you typically sell on similar items? For example, you are bringing in a new lampshade. How many per lampshade do you typically sell of your existing stock?
The big mistake that people make at this stage is assume that every item is going to become a best seller.
If you have 15 lampshades in stock, and 14 of them sell at a rate of 1 a week, and one sells 5 a week, don’t assume immediately that your new lampshade will match the rate of the best seller.
And if you don’t have ANY sales history and are just starting out, start by being as realistic as you possibly can. It takes time to gain traction.
The average website converts at 2% which will mean that you have to drive at least 50 people to your website before one person buys. How long do you think it will take to generate enough traffic to get your sales moving?
Two – how long do you want to have the product in stock for?
Once you have worked out how many you think you are going to sell per week, multiply that by the number of weeks you want to stock the product for.
If you change your stock twice a year, you won’t want the stock for more than 26 weeks.
And if you are buying seasonal product, for example Christmas ornaments, make sure you only buy enough to cover you for the weeks running up to that season.
As an example, imagine you are buying a new scented candle. Your current scented candles sell at around 3 per week.
You want to change your candle display 4 times a year, so you decide to only buy enough for 13 weeks.
Ideally then you would buy 39 candles (13 weeks x an average of 3 per week).
Three – how quickly can you get more if you sell out?
Let’s say you work out you need 39 candles.
However, the candle supplier is very flexible and can get you more stock within 2 weeks.
Now you don’t have to buy all 39 candles upfront. In fact, you could buy just enough to cover you for 2 weeks or 6 candles rather than committing to all 39.
But, if the candle supplier was importing their stock and took 12 weeks to get you more, then you would need to buy enough stock to cover you for that whole 12 weeks.
But what if buying more gets me a better price?
It is very tempting to buy larger quantities to take advantage of better prices.
However, I would not advise you to buy more than you honestly think you can sell. Yes, each item will be more profitable, but if you get stuck with more stock than you can actually get through, it will quickly clog up your cash flow and cause major issues.
If you really can’t make it work with smaller quantities, ask your suppliers if you can give them a commitment to buy that quantity, perhaps over a longer period of time for example a year.
Not everyone will agree to this, but it’s worth asking. Spreading out your payments over a longer time period is always beneficial.
Refer back to your budget
If you are purchasing several items at once, you may find that you run through these numbers and then find that you are way over your budget.
Again, you do have to be strict with yourself at this point, and look at where you can cut back on quantities, or even drop a couple of lines in order to come in to budget.
Want to free up more money to bring in all that great stock you are thinking about? Then that’s about clearing out stock that isn’t working for you – a topic for another blog!
Golden Rule 2. Trial and repeat
As a retail business, your stock is your most valuable asset.
Almost certainly, it’s also your biggest expense, and if you look back at where most of your money has gone, your stock will make up the bulk of your expenditure.
In my last blog, I explored how you could calculate the right amount to order – in this blog I’m going to explore how to use trialling as a strategy to minimise your risk.
What is a trial?
Trialling stock basically means buying as little as you possibly can when you don’t know anything at all about how it is going to sell.
If you are first starting out, or launching a new product area, I would strongly suggest that you focus on how you can start selling your products with the smallest possible stock investment.
Starting small might mean that you may have to create products that are almost prototypes if you are manufacturing, or buy in very small quantities if you are purchasing from other brands.
Making clothes? Can you have a tailor create a handful of garments before you have even a small manufacturing run?
Skincare? Can you have your products made by hand before moving to a factory?
Launching a box service or subscription? Can you buy small amounts of products at full retail and put those in your box? (With the brand’s permission of course!)
Why should you trial?
Did you know that if you estimate how much something is going to sell, even if you are an experienced professional, you only have a 50% chance of getting it right?
I’ve certainly seen that in my career – every season, brand new products either sell out much faster than expected, or there will be some that we backed fully that did not sell at all.
However, once you do have even two week’s worth of sales to look at, you have an 85% chance of getting the re-order quantity correct.
Trialling also has the benefit of allowing you to just get started. Many people launching product businesses want to keep tweaking their product BEFORE it goes in front of the customer, so that they can have the “perfect” assortment.
The truth is, the best way to learn about your products is to try selling them, and then listening very carefully to what your customers are saying.
Find the balance between profitability and cash investment
The chances are, you will not make any money at all on any products that you produce or sell in this way.
Even though that is not a very appealing idea to most founders, it’s still much better to start small and learn, than to overcommit.
For example, let’s imagine you are creating a line of 6 children’s dresses.
You are going to sell them for £25, and to start with, you pay a seamstress £20 per dress to create each style in 4 sizes. Total investment is £480.
If you were having them manufactured, at a cost price of £8 per garment, if you had to manufacture 50 per style, you would be investing £2.4k.
But research if the model works in the long term.
The approach of making little money on the prototypes is only worth doing if you have already confirmed that you can make the products profitable once you are ready to commit to larger quantities.
Before you go ahead, even with the prototypes, you want to do your research into the costings so that you are confident that your business plan is solid.
Can you pre-sell?
Pre-selling, for example through a crowd-funder, is a great way to learn about what customers want to see before you put items into production.
As long as you are very clear with your customers about how long they may need to wait for the products, it can be a really interesting model for learning what your customers want.
What if you can’t buy small quantities?
If you are looking at manufacturing, then you may well have run into the issue of MOQs, or minimum order quantities.
Manufacturers will have MOQs that will range from 30-50, all the way up to 3000 or more.
If you are considering using a manufacturer, you sometimes can persuade them to lower their MOQs if you pay them more per unit.
You can start the conversation by asking them what it would take to get 50 of something, for example. They may still not be able to accommodate you, but it’s worth asking.
If you can’t get them to come down on their MOQ, consider how you could have the product made in another way – again, can it be made by hand for the first run, just so that you can create what you want without over committing to quantities.
Always think about reducing your risk
While it’s exciting to be planning your new product launch, always keep in mind that you need to manage your risk, and over spending on stock is a very real risk that product businesses face.
You want to do as much as you can to reduce your commitment in the early stages, so that when your products do take off and start selling, you’ll have the cash to really get behind them when you need to most!
Golden Rule 3. Clear as you go
Your stock can feel very personal.
You’ve spent ages deciding on a new range, you’ve got it photographed, promoted it and shipped some of it off to your customers.
The stock that you have in your business is something that you’ve chosen yourself, and put your own money into, so of course you are very invested in whether or not it sells.
However, the disadvantage of having such a connection to your stock, is that like a difficult relationship, it can be hard to know when to let go!
If it is not selling, then you need to clear it out of your business.
Even if you love what you have bought, even if you had really high hopes for how it was going to appeal to your customers and even if you can’t understand why it isn’t flying out.
Clearing slow stock is the key to a healthy cashflow
Imagine that your stock is not a physical product, but instead it’s a pile of cash.
If you look at this way, you can quickly imagine how much of the cash in your business is tied up in your stock.
Product businesses run effectively when they keep a tight control on the amount of stock that is in the business at any one time, because sitting on too much stock is the number 1 way to quickly get into difficulties with your cash flow.
Every business has best sellers and worst sellers
Within every business there are always hero products or bestsellers, and there are also things that don’t sell, or worst sellers.
Pareto’s Principle, also known as the 80/20 rule, shows that 80% of your sales will be coming from only 20% of your products.
Take a look at your business – based on the last 3 month’s sales, what percentage of your sales were you top 20% of products taking? Chances are, it will be a large percentage!
On the flip side, that means that 80% of your products are going to be taking only 20% of your sales between them. These slow selling products are known as “the tail”.
The key to having a profitable product business is reduce how much stock is in your “tail” so that you don’t end up with lots of products that aren’t generating much cash for you.
Try to “clear as you go”
The phrase “clear as you go” just means that you should regularly (4 times a year, or even twice a year) take action to have a clear out of slow sellers and discontinued items.
It means tackling the problems – items that you bought into but didn’t sell, best sellers that you re-bought but then stopped selling, or products where you had to commit to a really high minimum quantity which means you are left sitting on extra stock.
You need a stock-clearance sale
To clear the stock, you need to run a sale. For a stock clearance event, I suggest that you take a deep discount (for example 50%) and run it for a short period of time like a few days or a week. You want to make as big an impact as possible – change your home page to a sale banner, promote it on social media, perhaps run an Instagram stories sale or something to emphasise the urgency of the event.
If you only do this 2-4 times a year, it’s not going to damage your brand, especially if you make it clear that this is a clear-out rather than an ongoing promotion.
Doing it regularly also means that you shouldn’t have huge amounts of stock to clear each time, allowing the sale lines to sell out quickly and reinforcing the idea to your customers that if they want to get it at a discount, they have to be quick!
Think of it as clearing out your garage
It can feel really upsetting to sell off at a discount the products that you have paid good money for in the past.
It’s usually the top reason that people don’t clear out their stock as regularly as they should – because they are convinced that one day they’ll get a full price sale for that item.
I remember selling off some no-longer-needed buggies that had been stored away for a couple of years. I sold them for far, far less than I bought them for, but I was just glad to get the space back and have some spare cash.
You want your time, energy and money focused on new things
People like new things. It’s just human nature. Did you know that the on a typical website, the “New In” page is usually one of the most visited?
If you are selling to wholesale customers, the one thing they always want to know is what’s new.
You need to have a consistent flow of new stock into your business. That’s not to say that you constantly have to be coming up with new product ideas, but you do need to be introducing new colours, new options, sizes or versions of your existing products on a regular basis.
If you buy products from another brand, you want to be able to buy their new ranges, or introduce exciting new brands to your customers.
Think of it as a chance to start a new conversation with an existing customer, or to offer something new to someone who hasn’t bought yet.
However, if you try to keep bringing in new stock to a business where you are not clearing out the old stock effectively, very soon you will run out of time, money, storage space and energy as your whole business gets over-stocked.
Finally – I want to to talk through in more detail how to run a clearance sales as it’s key to your stock management.
Sometimes, stock does not perform as well as anticipated or hoped, this can leave items that are not moving.
Clearing underperforming stock is a key part of keeping a healthy flow of money coming into your business.
The best way to clear this stock is to have a sale, this motivates people to purchase your stock as well as bringing money into your business; but you have to be careful when planning these sales to avoid potential issues such as damaging your brand.
Here are some basic rules to abide by when planning clearance sales:
Only run the sales a couple of times a year at most. Having sales too often makes your customers get used to your items being on sale and may encourage them not to buy full price items.
Do not run the sales for too long, keeping them short creates a deadline that can encourage people to purchase these items. A general rule is to keep them under two weeks in length.
It may be frustrating if not all items get sold out, but there is an important trade off between getting rid of this underperforming stock and maintaining a strong brand, otherwise it again becomes the issue of customers becoming used to these sales.
Change it up
If you decide to run your sale for longer than two weeks due to items still not moving, consider changing up the message displayed alongside the sale.
Include things like: “new lines added”, “further reductions”, “last few days remaining” to avoid repeating yourself too many times.
When running clearance sales you should only target your underperforming lines.
Often, the traffic that you generate from the sale may lead your customers buying non-sale items as well.
The main target of the clearance is still to drive underperforming items out so ensure that the clearance is highlighted effectively on your site and draws the attention of your customers.
Having sales so rarely and briefly ensures protection over your brand image, and if those rules are adhered to you can go very steep with your discounts while not damaging your image.
Consider 50% off as a starting point. This will help drive sales in the short window of time you have to get rid of stock.
Adjust as needed
During your sale, watch how well your items are performing. If there is a certain item that is not moving don’t be afraid to further reduce its price.
While you are still trying to maintain a good brand image, your goal is still clearing your items. Again, the scarcity and brevity rules ensure that taking actions like these is acceptable as it is done in moderation.
Not for profit
Clearance sales are not for profiting on the items on sale. When stock is dead or underperforming it is just a drain on your cash flow.
Selling these items at a reduced price though may not yield profit is ensuring you get more money back into your business and open up doors for other items or ideas you may have moving forward and release the burden of the stock.
Sometimes clearance sales are necessary, however doing them in a way that is conscious of your brand and strategic ensures that it does not carry any negative impact on your business in the process.
Sticking to these basic rules you can conduct an effective clearance and get rid of the burden of all your dead and under performing stock items.
Find out more
If you enjoyed this post, why not get my ‘Introduction to Stock Management Guide.
It’s an e-book designed to give you more detail about scaling your business.
Getting your hands on the ‘Introduction to Stock Management Guide’ is easy, and you’ll get so much more too!
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E-book – 101 things to think about when you’re scaling your business
Margin calculator spreadsheet to check your profitability
E-book – Complete guide to Stock management
Workshop replay – The Launch Lowdown masterclass with Elizabeth Stiles
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