eCommerce 101: Everything You Need to Know About Inventory Turnover Ratio
Having an optimal inventory turnover ratio is critical to success and profit in the eCommerce industry. Learn how to calculate and improve it here.
If you’re an eCommerce seller, inventory turnover ratio is an important indicator of how well you’re managing both sales and stock.
Also called “inventory turn,” “inventory turnover” or simply “turn,” this entire concept may seem daunting, but it doesn’t have to be. Keep reading to learn everything you need to know about inventory turnover ratio, including our pro tips for improving yours.
What Is Inventory Turnover Ratio?
Inventory turnover ratio compares the average amount of stock you keep on-hand with the amount of stock you sell.
Calculating this ratio helps you to determine the effectiveness of your sales approach, as well as how well you’re managing your inventory. Inventory turnover ratios are usually calculated over the course of a year, but can be done more often. Going over how they are calculated will give you a better understanding of exactly what they are.
Inventory Turnover Ratio Formula
Generally speaking, if you have an inventory turnover ratio of 1:1, that means you turned over your entire stock once throughout the year. But if you have an inventory ratio of 3:1, you turned over your entire stock three times (meaning you sold all of your inventory, and then had to restock it again twice).
Here’s the formula for determining inventory turnover ratio:
Inventory Turnover Ratio = Inventory Sold ÷ Average Inventory in Stock
So, if you sold $100,000 worth of items, and keep $100,000 worth of items in stock on average, then your inventory turnover ratio would be 1:1. Or, as it is often written, simply 1.
But if you sold $300,000 worth of items, and keep $100,000 worth of items in stock on average, then your inventory turnover ratio would be 3:1 — or 3.
What Is the Best Inventory Turnover Ratio?
In most cases, a higher inventory turnover ratio is better than a low one. Look at the above scenarios, for example. In those scenarios, each business owner would be paying to store the same amount of inventory at any one time: $100,000 worth of items. However, the seller with an inventory turnover ratio of 3:1 or 3 would obviously make a larger profit, because they are selling their entire inventory three times over.
In the simplest terms, a high inventory turnover ratio means you’re selling a lot of products. And a low inventory turnover ratio means you might be paying too much to store your items (and therefore either need to up your sales or reconsider how much inventory you keep on hand).
That said, if your inventory turnover ratio gets too high, then you will also encounter problems such as running out of the items your shoppers want to buy. In that case, you will want to consider keeping more inventory on hand in order to meet demand and avoid losing potential sales.
Ways to Improve Inventory Turnover Ratio
Now that you know what inventory turnover ratio is and how to calculate it, let’s brainstorm a few ways to improve yours. For the most part, achieving an optimal turnover ratio can be broken down into categories:
- Increasing sales.
- Better managing stock.
The following tips all revolve around one or both of these factors.
The first step to improving your inventory turnover ratio is to get organized. Before you can increase sales or optimize your stock management protocols, you need to know everything about what you sell and what you stock.
Keep Good Records
A huge part of organizing and optimizing your inventory practices is to keep accurate and complete records. The key here is making sure everything is up to date and nothing falls through the cracks.
Just a few of the business areas in which you need to keep good records include: where you buy items from, how much it costs to store them, how much you charge for them, how many sales you make per month / quarter / year, what carriers you ship through, etc.
And to make it easier to manage your sales and inventory, automate your processes. Thanks to today’s technology, you can use automation to keep track of everything from catalog inventory to buyer personas to customer messaging.
A major key to having the best possible inventory turnover ratio is to restock effectively. But this isn’t as simple as it may seem.
For example, if you have an item that is flying off the shelves, you might not want to just stock a ton of it all at once. The storage costs for this method could prove to be too expensive, and what if the item suddenly stops selling as quickly?
Instead, purchase moderate amounts of hot-selling items frequently. Doing so will allow you to keep products on hand to meet buyer demands, and could also result in significant cost savings. In fact, this frequent-buying approach often enables eCommerce pros to get better rates from suppliers, resulting in an even better profit margin.
If you want to know what items you need to keep on-hand for shoppers, then you need to forecast upcoming demand accurately. This will help keep you from stocking the wrong items or running out of products your shoppers want.
For starters, consult past sales data to look at trends and figure out what items tend to sell the most, and when. You can also practice seasonal forecasting by thinking about what holidays or seasons are coming up soon to determine what shoppers will be looking for.
One of the best ways to improve your inventory turnover ratio, and profit margins in general, is to reduce your overall costs wherever possible.
While you don’t want to cut corners when it comes to item quality or providing good service, there are lots of other areas in which you can save money. Just a few examples of ways to reduce costs include:
- Shop around and compare prices when looking for a distributor.
- Negotiate prices with your manufacturers (for instance, lots of eCommerce sellers can get a better rate once they’ve been with the same manufacturer for a significant period of time).
- Compare shipping rates amongst different couriers.
This tip goes back to organizing and automating, but there are so many ways for you to optimize every facet of your supply chain processes. Enable your salespeople to focus on making sales by streamlining all of your logistics. You can use software to automatically track and keep records of what items are selling, which ones aren’t selling, how much you’re spending on storage, what you’re paying to purchase products, everything.
And once you optimize all of these processes, your entire supply chain will be running like a well-oiled machine. You can drop the items that aren’t selling, keep stock of the ones that are, and empower your sales staff to really knock it out of the proverbial park.
Deploy Successful Marketing Tactics
Okay, so, we’ve talked a lot about how to best handle inventory management. Now, let’s get to the fun part: how to make more sales!
To begin, we’ll start with the most obvious tactic. If you want to make more sales, you need to deploy great marketing strategies. Develop a strong brand voice and get your message out to as many prospects as possible. After all, how can you sell more items if no one knows you have them available for purchase?
Send Marketing Emails
One of the most effective strategies for marketing your products is to send out engaging emails. This starts by building up great email marketing lists and ends with creating targeted messaging that speaks to your prospects’ wants, needs and pain points. The goal, of course, is to entice recipients not only to open your email, but also to click through it to your website (and hopefully, to purchase your items).
Want to learn more about email marketing best practices? We have tons of guides and articles on the subject. Start here with our Definitive Guide to List Building, then head on over to 80+ Email Marketing Stats (Some of These Might Surprise You). And finally, finish up with this step-by-step article: 5 Email Marketing Tips Every eCommerce Seller Should Know.
Get on Social Media
Another great way to market your items for sale is to build up your social media presence. By doing a bit of research into the best hashtags to use for your industry, and studying what your prospects are talking about online, you can create targeted campaigns that could reach tons of potential customers.
Implement Effective Pricing Strategies
If you want more customers to buy your products, you need to price them effectively. This isn’t always as simple as just dropping prices, however.
That’s because, if you reduce your product costs too much, you could wind up on the losing end of an unattractive profit margin. Instead, be strategic in your pricing. Use strategies such as number psychology, decoy pricing, market skimming and others to best position your items to fly off the shelves. Learn more about all the different pricing strategies that might be right for your business here.
Stock the Right Items
Another important factor in getting your inventory to sell is to stock the right items. Pay attention to your customers and what they’re purchasing. You can do this by not only tracking sales within your own company, but also by following trends in your industry to learn more about hot or in-demand products.
Encouraging pre-orders can help you improve your inventory turnover ratio in at least two different ways. First of all, you’re influencing shoppers to purchase an item while they’re excited about it, before they have time to change their minds. Secondly, you’re enabling your company to keep an accurate tally of how many items you’ll need to have in stock. This goes back to proper forecasting, which pre-orders can make much easier to achieve.
Hold Clearance Sales
Another strategy that can help your inventory turnover ratio in multiple ways is to hold clearance sales.
First of all, clearance sales can help you make tons of sales by offering items at rock-bottom discounts. Secondly, this approach also enables you to get rid of older stock that may not be selling as well. That way, you can make room for new or more in-demand stock that you need to keep more of.
Communicate with Customers
Customer communication is absolutely essential to optimizing your inventory turnover ratio.
Of course you need to let shoppers know when certain items are back in stock or available so they can come buy them. But you also need to inform them of big sales you’re holding, or keep them aware of when their items have shipped / will be delivered.
At every stage of the customer journey, good communication ensures shoppers keep coming back to your store.
Ship Orders Quickly
Another important step in improving your inventory turnover ratio is to ship orders quickly. For starters, this practice allows you to get items out of your warehouse and on their way to a customer as soon as they’re purchased (meaning they are no longer taking up space in your storeroom or costing you anything).
Shipping orders quickly also leads to better customer satisfaction, and therefore, repeat business (not to mention positive reviews, referrals and a great seller reputation).
On the same note, if you want to keep customers coming back, while also avoiding excess items in your storeroom, you’ll want to do everything you can to reduce returns. This starts with offering high-quality products, but there’s a lot more you can do as well.
For example, post clear product descriptions on your items so shoppers know exactly what they’re buying. Another way to reduce returns is to publish useful help documentation and answers to FAQs on your website. The point is to give customers as much helpful information as possible from the beginning, so they are less likely to be dissatisfied with a purchase after receiving it. You can also employ a friendly, knowledgeable customer service team that is available to answer customer questions and help them learn how to use or get the most out of their new items.
Offer Excellent Customer Service
Finally, on that note, as we’ve said many, many times before — the key to success as an eCommerce seller is to offer excellent customer service. If you leave each and every shopper with whom you interact feeling like their questions have been answered and their time is valued, you will inevitably make more sales.
So, respond to messages quickly. Offer live chat support. Follow up with customers after your team has assisted them. Do everything in your power to delight your shoppers. If you do, you will, in all likelihood, sell more products and improve your inventory turnover ratio.
If you’re a multi-channel eCommerce seller, we know the prospect of responding to messages quickly can seem overwhelming. After all, you’re receiving messages from several marketplaces all at once! But that’s why Replyco exists.
With Replyco, you can centralize all of your messages from every marketplace and eCommerce platform into one, easy-to-use inbox. And with templates and smart automation tools, we make it easy to save time and keep customers happy no matter what time it is.
Have any questions? Feel free to reach out to us any time. We’re always thrilled to help!