11 Ways to Improve Inventory Turnover Ratio in eCommerce

Your inventory turnover ratio reveals useful insights to help you optimize your eCommerce inventory management. This information can help you spot weak sales, lackluster market demand or if available inventory can support the sales rate.
Sadly, several sellers struggle to improve their ratio, making scaling at large more challenging.
Here, you’ll learn ways to improve your eCommerce inventory turnover ratio, including the perfect ratio to aim for and how to calculate your store ITR.
Let’s get started.
The perfect inventory turnover ratio for your store depends on the product.
However, between four and six will work for most eCommerce stores. It lets you balance sales and the restock rate, meaning you’ll neither have a lot of unsold inventory on your shelves nor run out of stock.
Calculating your store rate is pretty straightforward.
We’ll discuss that later in the article. For now, let’s explore why eCommerce merchants struggle and 11 ways to improve your inventory turnover ratio.
Improving the inventory turnover ratio is not a walk in the park. So let's see why several eCommerce merchants find it challenging.
Several eCommerce brands lack the in-house skills to monitor and optimize their turnover rates. A typical Inventory Control Manager earns between $74,600 and $126,390 annually.
And this might be too much for most eCommerce businesses.
Lack of enough capital to quickly replace sold items could affect a merchant's ability to report a good inventory turnover ratio. Also, investing in quality marketing to push slow-moving inventory could cost a leg and an arm.
eCommerce merchants could experience a nonoptimal inventory turnover ratio when they lack ideas on balancing their sales and the restock rate. Having a good ratio often requires thinking out of the box.
Slowing moving products is one of the biggest reasons merchants struggle to improve their turnover ratio. Besides typing up capital, they could also incur unnecessary expenses.
Lack of in-house skills, financial constraints, slowing-moving products, or idea shortages are already enough headaches for merchants. However, two or more of these factors make improving their eCommerce ITR more challenging.
Let’s explore 11 ways to improve your store inventory turnover ratio.
A more clinical future sales forecasting model provides insights that can guide you on the optimal inventory to stock during each period, enabling you to maximize your shelf spaces.
A beverage brand saves $9 million yearly by improving the accuracy of its forecasting model. It achieved this by expanding its data sources instead of relying on historical data alone.
Including external factors in the demand forecasting model might require special technologies and processes.
One of Malaysia's leading apparel eCommerce fulfillment providers achieved a massive turnaround by automating its end-to-end warehouse and fulfillment processes.
The company reported a 72% reduction in dock-to-stock time, 99% order accuracy, and real-time omnichannel order synchronization.
It can also fulfill 20 line items per minute.
An automated inventory system might not be able to account for spoilage. So, complement the system with periodic physical audits from trained employees and external auditors. That’s why it is also important to invest in the right inventory management solution for your store.
Several eCommerce brands solve this challenge by implementing an automated inventory management system and conducting regular stock counts.
But they are not often enough to deal with this issue.
You'll experience regular stockouts, regardless of your inventory management system, if you have a poorly optimized supply chain. Also, too much safety stock could lead to high holding costs. So, find your ideal safety stock level before implementing this practice.
Clearance sales can help you push slow-moving products.
Tortuga, an online backpack retailer, uses an unconventional clearance sales strategy to move older products. The brand sells those items on Amazon at a lower price to move the remaining inventory while selling in-demand products at a higher price on its DTC channel.
Poorly planned clearance sales could cause sales cannibalization and channel conflict.
Hey, check this out: 12 stories: Brands that managed channel conflict like champs
Responsive pricing and smart strategies like price anchoring can push inventory beyond expectations. For example, Steve Jobs of Apple used the price anchoring technique to sell over 300,000 iPads at launch and more than 15 million before the iPad 2 launch.
Responsive pricing could trigger a price war. So, always plan out your counter moves.
Selling preorders can improve inventory turnovers dramatically. Mellow is an excellent example.
The brand made about $200,000 in less than a month from preorder sales. It built its campaign on a solid PR strategy, generating massive product awareness, and leading to a mad rush for its smart kitchen appliances.
Preordering can help you learn how much inventory you'll need to maximize your storage space and minimize overstocking and stockouts. However, a short preordering period might not be enough to gain actionable insights for precision forecasting.
Conversely, a more protracted campaign might cause it to lose its appeal.
Bestsellers already have high market demand; stocking and prioritizing them ensures you don't experience many inventory turnover issues.
Stocking bestsellers mean you might quickly run out of stocks or get overwhelmed with fulfillment, especially during peak periods. So, plan your supply chain.
About 78% of Amazon Prime members, which generate about $25 billion yearly and nearly $12 billion during Prime day 2021, joined the program due to free shipping.
Ninety percent keep their subscriptions for the same reason.
So, a good shipping experience can improve your inventory turnover as 93% of consumers will shop online more often if it includes free shipping, and 58% would spend more to qualify.
Free shipping and shipping discounts can cut your profit margin deeply. Ensure your business can sustain that before offering them.
Enable frictionless shopping to retain customers and improve your turnover rate.
LuckyVitamin does it well. Finding products and checking out of the store is straightforward. You don't have to sift through overwhelming amounts of information or scroll deeply to find what you are looking for.
Also, the store is noiseless, with zero distractions.
The store’s SimilarWeb data shows it received about 3.7 million visits within the last three months, between August and October 2022.
Nearly half of the visits were direct, probably from returning shoppers, indicating high customer satisfaction.
Don't assume for customers. Instead, use A/B tests to eliminate guesswork and offer the shopping experience your shoppers will love.
Keep Reading: eCommerce Checkout Process Optimization Guide
Test product adoption before rolling out big to understand what customers want instead of creating what you think they'll love. Jeff Bezos of Amazon made this mistake when designing the Fire Phone, costing the company over $170 million due to unsold inventory.
A former development team member said they "poured surreal amounts of money" developing the Dynamic Perspective, one of the phone's headline features, even when they believed it has no value for customers because "Jeff wants it."
Customers don’t always know what they want. Your brand positioning and messaging could convince them to love what you love.
You'd also love reading: 20 Powerful Ways To Reduce (And Prevent) eCommerce Churn
Use up excess inventory by redistributing stock across distribution channels.
Three Ships was selling on its DTC channels with little success. So to move inventory faster, the brand launched on Target, an online marketplace. The channel expansion helped them reach a broader US audience without hurting existing channels.
Not being strategic with your channel expansion could hurt existing sales channels, cannibalizing your revenue.
Let's explore some things improving your store ITR will bring to the table.
An improved inventory turnover ratio means you won’t have to keep items in stock on your shelves for long, lowering your carrying costs.
Since customers are always buying your items, you’ll have a lot of liquid capital to take care of other pressing needs.
Stock spoilage is one of the worst nightmares of consumer goods retailers. A high ITR makes you less vulnerable to these risks. It also minimizes your chances of storage risk exposure like burglary, fire outbreaks, flooding, among others.
eCommerce aggregators purchase thriving eComm brands on top marketplaces like Amazon and Shopify. Stores with impressive ITR land more lucrative valuations.
Let's see some things that can influence your eCommerce store's inventory turnover ratio.
A change in customer preferences and tastes can affect a product's demand, effectively influencing the inventory turnover ratio. For instance, customer preference for electronic mail and instant messengers declined the demand for postal stamps.
Sales seasonality can also influence the eCommerce turnover rate. For instance, Amazon experiences peak sales during Prime Days and shopping holidays like Black Friday, Cyber Monday, and Boxing day. It sold over 250 million products worldwide during 2021 Prime Day.
Market shifts like a new competitor entrance, changes in supply and production costs, rising inflation, and change in the price of related items can influence ITR.
Technological advancements streamline production processes, supply chain, and inventory management, leading to improved efficiency, which often translates to lower prices and more demand, consequently impacting the ITR.
Calculating and tracking your inventory turnover ratio regularly lets you monitor your store performance. The standard method is to divide the Cost of Goods Sold by Average Inventory.
You can get your average inventory in a period (let’s say, yearly, quarterly or monthly basis) by dividing the sum of the beginning and ending inventory by two.
For instance, if you wish to calculate the average inventory for 2021, add the inventory at the beginning of the year with what you had on December 31st and divide by two.
You can use the ending stock to calculate your ITR if your store doesn’t face seasonal fluctuations. However, the more data points you use in your calculation, the more accurate it becomes.
Pro Tip: Divide by 12 the sum of the monthly average inventory to get more accurate data for your annual average inventory. Also, calculate your monthly ITR and plot it on a line graph to learn how your ITR fluctuates over the years.
We have seen 11 ways to improve your eCommerce inventory turnover ratio.
However, it's not a walk in the park. So you'll need to roll up your sleeves. But actioning the tips here can put you on the right footing and make it less challenging. Also, pay attention to the caveats and remember to split-test your changes.