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Managing online retail stock-outs critical to business success

April 29th, 2011

  By: Makenzie Marineau, 541-737-4611; marinema@onid.orst.edu

Source: Minjeong Kim, 541-737-3468; Minjeong.Kim@oregonstate.edu

The following release is online: http://bit.ly/f9Maga

CORVALLIS, Ore. – The online shopper places an order for size 8 navy boot-cut jeans, only to discover they are out of stock again. With the click of the mouse, the shopper is off to a different online store.

Another customer – which means revenue – is lost to what researchers call “online stock-outs.”

According to industry statistics, stock-outs cause a projected $25 billion in losses for individual businesses every year. To a struggling business, simply being out of merchandise doesn’t just put an immediate dent in finances, according to Oregon State University researcher Minjeong Kim. It can also mean adverse long-term impact such as loss of market share due to customer dissatisfaction, loss of patronage, and negative word-of-mouth.

In a recent study published in the journal Psychology and Marketing, Kim analyzed why managing online stock-outs could be the difference between business success or failure to an online apparel retailer. Those losses for e-commerce businesses from stock-outs can be minimized, she said.

In their study, Kim, an associate professor at OSU’s Department of Design and Human Environment, and University of Delaware researcher Sharron Lennon studied how consumers respond to online stock-outs and how stock-outs can be effectively managed when they occur.

“By looking at a picture of an item online you would assume it’s available, but in reality they could be out of stock,” Kim said. “Stores need to understand it’s important to find a fine balance between overstock and stock-outs.”

Kim and Lennon created a mock clothing website, and then studied the consumer behavior of 5,000 randomly-selected female college students. Each participant was asked to find two items she wanted to purchase. Some items were available and others weren’t, giving the mock site a feeling of a real online shopping experience. Some participants found that their two preferred items were in stock, while others found that they were not available.

The negative reactions were all linked to how the online store managed stock-outs. Websites that did not notify the consumer until the check-out process that an item was out of stock were rated significantly worse than businesses that informed their customers earlier in the shopping process.

“Timing of out-of-stock notification, preference of unavailable items, and frequency of stock-outs are critical in determining how people respond to the stock-out,” Kim said. “By simply notifying in-stock status up front, e-commerce businesses can minimize negative consumer reactions to stock-outs.”

“Companies also need to make sure that their popular items are in stock,” she added. 

Kim said Amazon.com is a positive example of a company that provides a stock status for customers by including when the item will be expected to ship, and when it will be restocked.

 “When you can manage and meet your customer’s expectations in the long run, you’ll have a more successful business,” she said.

In a follow-up study, the researchers found that customers experienced less negative emotion when the online retailer acknowledged the stock-out. Compared to simply acknowledging stock-outs or giving a backorder option, financial compensation such as discounts on next purchase was more effective in mitigating the negative impact of stock-outs on patronage intention.

Kim, who is also the program coordinator for Merchandising Management at OSU, said her research is also looking at consumer misbehavior on one of the busiest shopping days of the year – Black Friday.

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