In the ever-evolving, fast-paced digital landscape, metrics are a lifeline for e-commerce brands.
They hold the key to measuring your performance, setting goals, identifying strengths and weaknesses and guiding data-driven decisions.
But in the modern marketplace, metrics are everywhere and it can be hard to know which to give your time and energy to, and which not to bother with.
This blog will reveal six essential demand planning, forecasting and purchasing metrics which should be top of your list of metrics to pay attention to for success.
1. Inventory Turnover Ratio
What is it? Inventory turnover ratio is a financial metric that illustrates the frequency with which a company replenishes its inventory relative to the cost of goods sold (COGS) during a specific timeframe. Merchants typically divide the length of the period (usually a fiscal year) by the inventory turnover ratio to work out the average length of time it takes to sell inventory.
Generally, the higher the ratio, the better. A low inventory turnover ratio may be a sign of weak sales or excess inventory, while a higher ratio often reflects strong sales (but beware: this can also indicate a lack of stock).
Why does it matter? The most successful e-commerce companies are the ones that can turnover stock more quickly, so your inventory turnover rate is a critical measure of business performance that you should definitely be aware of.
Calculating and tracking your inventory turnover rate in Inventory Planner will help you make smarter decisions, especially when it comes to pricing, marketing and production. It’s particularly important if you trade in seasonal or perishable goods.
2. Average Order Value (AOV)
What is it? Average Order Value (AOV) is a critical metric used by e-commerce retailers to measure the average total of every order placed with a merchant over a defined period of time. By working out the average amount customers spend per order, merchants can identify customer preferences and optimize inventory purchasing decisions.
Calculating AOV is easy – you simply divide your revenue from a certain period by your number of orders. If you use Inventory Planner, it’s even more simple.
Why does it matter? Understanding how much customers typically spend in one order can help you figure out if your prices are set right and if your online marketing is working well. It can reveal opportunities to increase revenue through upselling and cross-selling and also lets you measure how much each customer might bring to your business over a longer period.
3. Annual Inventory Holding Cost
What is it? Inventory carrying costs (also known as holding costs) are the expenses incurred by a merchant to store and maintain its inventory. The costs are directly linked with how much cash a business has tied up in inventory and its potential for profitability.
Annual Inventory Holding Cost quantifies the cost of holding inventory over a year, factoring in expenses like warehousing, storage, transportation, insurance and depreciation.
Simply dividing total annual inventory value by four provides a rough estimate of carrying costs. For a more accurate calculation, add up all associated costs of carrying inventory across 12 months and divide it by total inventory value, as shown in this formula: Associated costs (annual) / total inventory value (annual) x 100 = inventory carrying costs.
Why does it matter? With costs rising, the economic outlook uncertain and cash reserves running low, retailers need to take action to cut inventory carrying costs in order to maximize profit and boost cash flow. It’s essential that merchants can calculate and understand their inventory carrying costs in order to gauge the scale of action required to reduce them.
4. Average Stockout Rate
What is it? A stockout is when a business runs out of a specific product. The average stockout rate measures the frequency at which products are unavailable for purchase due to insufficient inventory.
A business can monitor its stockout rate in Inventory Planner or calculate it manually by dividing the number of products not in stock by the total number of products that are held and available for sale.
Why does it matter? Stockouts directly impact customer satisfaction and result in negative reviews and loss of sales and customers. Keeping an eye on your average stockout rate is key to mitigating the impact of stockouts, including revenue loss. The best way to avoid stockouts in the first place is to accurately forecast demand and buy inventory based on reliable buying recommendations.
5. Gross Margin Return on Investment (GMROI)
What is it? The gross margin return on investment (GMROI) is a way to see how well a company can make money from its inventory. It looks at whether the company can sell its inventory for more than it cost to buy.
As explained in this Inventory Planner video, e-commerce merchants often use it to see how successful they are at making money from the inventory they have. Another name for GMROI is gross margin return on inventory investment (GMROII).
Why does it matter? The GMROI is a useful measure as it helps the merchants see the average amount that the inventory returns above its cost. A ratio higher than one means your business is selling merchandise for more than what it costs. Some experts suggest GMROI should be 3.2 or higher so that all costs are covered.
6. Forecast Lost Profit
What is it? Forecast lost profit is a vital replenishment metric that reveals how much profit you will lose if you delay reordering inventory. In Inventory Planner, forecast lost profit is calculated as stockouts during the lead time x profit. Forecast loss profit specifically looks at lost potential during lead time so if you ordered tomorrow, you would get that back in stock and stop the clock on lost profit.
Why does it matter? Forecast lost profit is a powerful metric that can help merchants ensure inventory is ordered at the optimum time to avoid losing profit. When budgets are tight, Inventory Planner’s additional metrics, such as cost value of replenishment and replenishment profit, can help you work out where to focus your reordering efforts to make the most money.
Inventory Planner offers you access to all the demand planning and replenishment metrics you need to succeed, in one handy dashboard. Find out more with a free demo.