Stockout costs are the costs for retailers due to out-of-stock items, including the following 4 components:
Inventory carrying cost
Suppose that you’re running an end-of-season sale; stockouts reduce the impact of discount promotions. Moreover, when the goods reach the store, customers may have been discouraged and won’t buy again. It can result in higher inventory carrying costs such as dead or obsolete inventory that you can no longer sell due to being out of season.
Order processing cost
Suppose that your customer doesn’t want to wait for the out-of-stock item back in stock; they may re-order it. As a result, your customer service will modify the order to create a new matching delivery date. In addition, there may be additional shipping charges if stockouts are part of a larger delivery, where a later order will require special shipping.
There is also the cost of minimizing customer dissatisfaction by offering incentives to prevent negative reviews on social media. As a result, the retailer may have to provide customers free shipping or a discount to compensate for the inconvenience caused by stockouts.
Losing customers to stockouts is the highest cost to a retailer. If the customer is a large buyer, the costs can be very high and put you in financial trouble. In addition, there is the cost of finding new customers, which is usually 3 times higher than nurturing old customers.