Key Performance Indicators (KPIs) are the metrics used to measure the performance of a business. Similarly, ecommerce metrics are the KPIs that can help online businesses evaluate their performance, set benchmarks, and take corrective measures to steer the business in the right direction.
In this ecommerce metric refresher, you will learn what is average age of inventory, how to calculate average age of inventory, why should businesses calculate inventory ageing, benefits of reducing average age of inventory, and the strategies to reduce average age of inventory.
Inventory ageing (also known as average age of inventory) is an ecommerce metric that enables you to determine how long SKUs (Stock Keeping Units) remain in your warehouse before a sale. In simpler terms, it tells us how many days it takes a company to sell its stock.
The following illustration shows the inventory ageing or average age of inventory formula:
Let's see how to calculate inventory ageing or average age of inventory with an example,
Note: If the company sells its inventory quickly, the average age of inventory decreases, which means more revenue for your business.
By taking inventory ageing into account, businesses can deal with inventory or merchandise piling up in storage and take revenue-oriented decisions.
There are many reasons for businesses to calculate inventory ageing, such as:
There are various strategies to lower your ageing inventory, but it is essentially done in one of the two ways:
You can expand your reach and improve conversion rates by selling on multiple sales channels with multiple integrations. More channels will significantly boost your sales and increase your sales velocity and ultimately, increase your revenue.
You can manage your stock using a first-in, first-out (FIFO) strategy; the items received first will be utilised to fulfil customer orders first. And, to compute the age of a product, you can go through your historical stock backwards, subtract stock intakes from the current stock until you reach zero. It will lower inventory ageing significantly.
By splitting your inventory across a distributed network of fulfilment centres, you can segregate your products into prime and non-prime locations. Instead of stocking all the units in one place and then sifting through the pile. Reserve prime location for frequently purchased items and shift slow-moving SKUs to non-prime locations. It would also help you serve your customers better.
You can identify slow and poor selling inventory and bundle them with fast-selling inventory to prevent inventory ageing. Such merchandising techniques like product kitting, upsells, and free shipping over minimum threshold enable you to sell your inventory as quickly as possible and also increase your Average Order Value (AOV).
To increase your sell-through rate and clear inventory fast, you can drive repeated purchases through a powerful customer retention strategy, i.e. loyalty or rewards programs. Customers can earn points that can be redeemed on future purchases or avail exclusive benefits.
By hosting a flash sale, you can clear out inventory in a matter of few days. A sale attracts online shoppers to impulse buy and boosts sales in a jiffy. It not only helps break-even on overstocked and poor-selling items but also make room for new inventory.
Not all acts are driven by revenue. If you have a cause in mind, and your product is a good fit, then go ahead and donate. What’s more, consumers trust brands that are committed to a cause.
Sometimes merchandise is hard to move, warehouse fees pile up, and profit margins shrink. By calculating inventory ageing and applying it, you can make the right inventory liquidation decision. It will give you more insight into your retail business and permit you to adjust your inventory. With action-oriented steps, you can lower inventory ageing and break-even on slow or poor-selling products.