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.
What’s the Perfect Inventory Turnover Ratio for Your Store?
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.
Why eCommerce Sellers Struggle to Improve 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.
Lack Technical Know-How
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.
Selling Products with Declining Demand
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.
A Mix of These Things
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.
11 Ways to Improve Your eCommerce Inventory Turnover Ratio
Let’s explore 11 ways to improve your store inventory turnover ratio.
1. Improve the Precision of Your Product Demand Forecasts
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.
How to improve product demand forecasting
- Use historical data, seasonal trends, and external economic data, such as weather patterns, consumer spending power, and recent sales metrics of complementary goods, to understand customer demands better.
- Carry out a marketing survey
- Collect expert opinions
- Empower sales agents to forecast demand within their territories, then aggregate the data to develop the company's overall demand forecast.
- Use econometric and statistical forecasting models.
Including external factors in the demand forecasting model might require special technologies and processes.
2. Use Inventory Management Automation
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.
How to implement successful inventory management automations
- Research and define what your requirements are
- Determine your budget for the project and timeline
- Decide on the automated inventory system to use
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.
3. Restock Before Inventory Runs Out
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.
Other ways to avoid regular stockouts
- Set the reorder point for each item—minimum product quantity needed at any time.
- Improve sales forecasting capabilities
- Keep extra products in inventory as safety stock
- Maintain expedited delivery contracts with suppliers
- Synchronize inventory across all sales channels
- Use RFID technology to track inventory in real-time
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.
4. Use Clearance Sales to Boost Turnover Ratio
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.
How to improve inventory turnover with clearance sales
- Time your clearance sales right—shopping holidays are often better
- Set actual prices, not percentage-offs, to attract bargain hunters
- Plan your marketing campaigns and promotions
- Sweeten the deal by increasing the discount gradually to motivate more buyers.
- Use product bundling to move inventory faster.
Poorly planned clearance sales could cause sales cannibalization and channel conflict.
Hey, check this out: 12 stories: Brands that managed channel conflict like champs
5. Make Your Pricing Responsive
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.
How to implement responsive and smart pricing strategies
- Display items beside higher-priced products to improve their demand
- Use competition-based pricing to stay competitive
- Pick your price based on what customers think the value is (value-based pricing)
- Set a high reference price and run promotions to sell at a lower the price
- Use tiered pricing to cater to all categories of buyers
- Use penetration pricing to build a loyal customer base for new products or markets
Responsive pricing could trigger a price war. So, always plan out your counter moves.
6. Sell Preorders
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.
How to launch a successful preorder campaigns
- Define how long the campaign will last
- Decide on whether customers will pay now or later
- Develop your preorder marketing plan
- Launch your campaign, emphasizing the limited-time offers
- Use early adopter discounts and media buzz to create FOMO
- Track orders with a CRM and capture valuable data
- Perform post-campaign analysis to gain insights into how to manage inventory
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.
7. Stock and Prioritize Best Sellers
Bestsellers already have high market demand; stocking and prioritizing them ensures you don't experience many inventory turnover issues.
How to stock and prioritize best sellers
- Conduct customer surveys to identify fast-moving products
- Stock non-seasonal items to diversify your product line
- Use Google trend to find high-selling products
- Create a bestseller section on your eCommerce store
- Implement AI-powered product recommendations on your online store
Stocking bestsellers mean you might quickly run out of stocks or get overwhelmed with fulfillment, especially during peak periods. So, plan your supply chain.
8. Offer Better Shipping Experiences
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.
How to improve store shipping experience
- Offer real-time shipping tracking
- Provide multiple shipping options—same-day delivery, expedited shipping, international shipping, and subscription shipping program
- Stick to the estimated delivery time; don't be late
- Include a flexible return policy
- Use sustainable and eco-friendly shipping methods
- Offer personalized shipping packaging
- Provide free shipping or shipping discounts to motivate buyers
Free shipping and shipping discounts can cut your profit margin deeply. Ensure your business can sustain that before offering them.
9. Offer Intuitive Shopping and Checkout Experience
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.
How to enable a seamless shopping experience
- Eliminate friction from every customer touchpoint.
- Enable guest checkout and multiple payment options.
- Provide real-time customer support.
- Make your store easily navigable with categories, filters, and comparison tools.
- Set competitive pricing and offer discounts.
- Make the signup and checkout forms short.
- Provide a better shipping experience
- Support multiple sales channels to enable customers to shop on their preferred platforms
- Publish customer reviews
- Create a best-selling section and enable product recommendation
- Use data and machine learning to deliver a personalized shopping experience
- Develop a mobile app to encourage on-the-go shopping.
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
10. Allocate Some Resources to Testing New Product Line Adoption
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."
How to track new product line adoption
- Measure your store conversion rate to learn the percentage of potential customers that turned into paying customers
- Calculate time to value (TTV) to learn how long it takes customers to realize the product's value. eCommerce stores could measure it as the time between the first web visit and successful checkout.
- Measure the retention rate to see how customers are returning to the product
- Use churn rate to gauge how well your long-term adoption strategy is performing.
- Leverage customer surveys to gain real insights on what needs improving
Customers don’t always know what they want. Your brand positioning and messaging could convince them to love what you love.
11. Redistribute Products Across Warehouses
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.
How to use up excess inventory to improve the turnover rate
- Move excess stock to warehouses or retail outlets in locations with more impressive inventory turnover
- Launch on marketplaces like Amazon and eBay to expand your distribution channel
- Open brick-and-mortar stores to reach non-eCommerce shoppers
- Launch an affiliate program or distributors network
- Encourage merchants to dropship your products
Not being strategic with your channel expansion could hurt existing sales channels, cannibalizing your revenue.
Benefits of Improved Inventory Turnover Ratio
Let's explore some things improving your store ITR will bring to the table.
Lower Carrying Costs
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.
Reduced Chance Of Stock Spoilage
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.
Command Better Ecommerce Aggregator Valuation
eCommerce aggregators purchase thriving eComm brands on top marketplaces like Amazon and Shopify. Stores with impressive ITR land more lucrative valuations.
What Influences the eCommerce Inventory Turnover Ratio?
Let's see some things that can influence your eCommerce store's inventory turnover ratio.
Customer Preference Shifts
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.
How to Calculate Your eCommerce Inventory Turnover Ratio
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.
Improve Your eCommerce Inventory Turnover Ratio
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.