We created the Inventory Prioritization Matrix to help you optimise your working capital and especially the amount of cash that you committed to the inventory that you hold.
The goal is to help your identify where you can quickly and / or easily turn part of your inventory catalogue into cash, which gives you the option (and power) to decide whether you want to reinvest that cash into the business for growth or pay yourself dividends.
This is the basic premise of how the Inventory Prioritization Matrix helps you identify and prioritise the opportunities to optimise your working capital committed:
🔥 Opportunity: We're also currently building the first version of Cogsy to automatically do this analysis for you in real-time, along with some other features (calculating LTV and AOV per product, and real-time demand forecasting) to help you proactively optimise your inventory in the smartest and most effective way. Sign up here to get beta access.
- First up, we analyse and classify each individual SKU based on two data points: their retail value (and thus contribution to your total revenue) and the velocity at which they sell. Visualising this on a matrix, helps you already understand how important individual SKU's are to the business.
- What are you likely to find, is that the vast majority of revenue is earned from a very small percentage of SKU's (simply 80/20 rule at play). We also know that your bestselling SKU's also has a positive contribution and correlation to Customer Lifetime Value. So the first step here is to ensure that you never run out of stock for your bestselling SKU's, because you're not only missing out on that single sale, but you're likely missing out on the subsequent lifetime value of that customer that ultimately takes their dollars elsewhere.
- Beyond your bestselling SKU's, the matrix also helps you identify opportunities for the rest of your SKU's where the goal is ultimately to move them up into the vicinity of the "A-High" (i.e. best) category. Depending on where a SKU is at this stage, different tactics might make sense. In addition to the analysis, we've included a bunch of suggested actions you can take per every category or individual SKU's to incrementally optimise your working capital.
also speed up your navigation of the sheet by setting up quick links.
We're looking for your sales data per product per month. To get your data imported you will need the following data fields (it is also easiest if you add them in this order)
To get the best out of the Google Sheet, we recommend :
- Importing at least 12 months of data.
- And if you import more data than that, do it in 12 months increments i.e. 12 / 24 36 months.
This ensures that the analysis can account for calendar-year based seasonality.
- In you Shopify dashboard, go to Analytics → Reports.
- Start with the "Sales by product" report.
- Now edit the columns, so that the following columns are displayed :
- Total Sales
- Gross Profit (optional)
- Cost (optional)
- Net Quantity
- Variant SKU
- Variant Title
- Product Title
- Select the time / date range.
- Click "Export" which will give you a CSV file which you can then import into the Inventory Prioritization Matrix.
We're adding specific steps for other platforms (WooCommerce, Bigcommerce etc) here shortly.
In the Google Sheet, each of the separate sheets i.e. "A-Medium" or "B-Low" has some suggested actions you could take which looks like the image on the left. Those suggestion actions are all linked to the sheet below here and you can follow them at any time to get some ideas about how you use the insights garnered from the Inventory Prioritization Matrix to take action and actually liberate some cash.
As a reminder of what I mentioned in the Overview right at the top of the document, there are a few outcomes that we're trying to achieve with the Inventory Prioritization Matrix (and the tactics mentioned below are ways of doing that). Those outcomes are :
- Always prioritise your bestselling SKU's. Ensure that you have enough stock on hand for those and that you have sufficient cash flow to ensure that you can purchase new stock when you need it.
- Increase the velocity at which certain SKU's are selling. An increased velocity here implies that you are improving your inventory turnover which in turn will increase your cash flow (Improvements in cash flow gives you optionality i.e. you can reinvest that cash into the same SKU's or invest elsewhere in your catalogue or even your business).
- Simplify your product catalogue by either reducing the # of units you hold for certain SKU's or eliminating certain SKU's completely. Both of these will release working capital committed and allow you to reinvest it elsewhere in your business.
1.) Price testing
Changing pricing for specific SKU's naturally takes one of two directions: increasing or decreasing the current price. Both of these actions might present a risk and detrimentally affect your sales, so we always recommend that you run these as tests or experiments to determine what their impact is.
A full-blown A/B test might not be necessary (if you don't have the software implemented to do this quickly, then don't bother). Instead here's a quick & dirty way of doing it:
- Run the experiment for a week and compare sales for that SKU to previous weeks. Try not change anything else that could impact sales for that SKU. If the direction seems positive, continue running the experiment.
- Keep monitoring your data on a daily basis. If someone seems off or obviously broken, revert to the previous pricing immediately and go back to the drawing board.
For price increases, the sky is the limit and you could for example keep increasing the price of a bestselling SKU until sales start flattening. For price decreases you however want to be more circumspect and keep your gross profit margin / cost of goods in check too. Only dip below that threshold for a SKU if you're certain that it can be a loss leader for you and that it positively influences other metrics positively (like LTV and AOV).
In the context of the Inventory Prioritization Matrix, this is how we use a price increase or decrease:
- Price Increase : We already have a product that has high (or good) velocity and we think we can get more value from that if we increased price.
- Price Decrease: We have a product with high value (probably
due to a higher price), but it is not moving as quickly as we'd
hope. We're thus hoping that a slight price decrease will
increase the velocity significantly.
A few of my favourite resources for price testing or experimentation :
2.) A few of my favourite resources for price testing or experimentation:
For SKU's that have decent value and have some velocity, we might be able to reduce the number of units for those SKU's. You should have a "Safety Stock" number for each SKU, which is effectively the minimum number of units you need to hold for that SKU before you expect to run out.
Here's a scenario in which you could probably safely reduce the number of units you're holding:
- For Product A, you're currently holding 100 units and have averaged selling 15 units a month for the last 12 months.
- Depending on how you calculate your Safety Stock number, you can perhaps only hold a month or two's worth of units.
- So in this scenario, you can continue selling Product A and only re-order when the number of units on hand reaches the 15 - 30 unit range.
- If you'd like to reduce the number of units for this SKU more aggressively, you could consider running a flash sale or promotion of sorts to reduce those 100 units to closer to 30 quickly.
Product bundling is a big topic and has many applications. In the context of the Inventory Prioritization Matrix, we want to want to create bundles that increase velocity and ideally we're hitching a slower-moving SKU onto a faster and higher-value SKU.
Create a typical "Buy in bulk and save X%" bundle could work for example, but it might not move an individual SKU into a better classification on the Inventory Prioritization Matrix.
When looking at bundling, here's a few rules of thumb :
- Leverage your best-selling SKU's and add slower-moving SKU's onto their velocity.
- Think about combining high- and low-margin products so that you ideally get a higher-than-average margin return on bundles.
- Also play with the individual values of the products included in a bundle. Including two high priced SKU's in the same bundle isn't as successful as having one high and one lower priced SKU.
If you need inspiration for bundling, here's a few resources to get you started :
4.) Clearance Sale
A clearance sale is best used for products that are very slow moving and likely already obsolete (i.e. low value, low value velocity and low confidence that you will sell out of these any time soon or at all). The goal here is to get cash for these SKU's as quickly as possible and then likely not replace them.
The easiest way to handle such stock is to have a persistent "Clearance" or "Sale" collection or category on your store and then moving slow-moving SKU's into that collection / category based on where it falls on the Inventory Prioritization Matrix.
5.) On Demand
We often build our product catalogues to be wide and deep enough to enable cross- and upselling, as well as repeat purchases because this positively influences LTV and AOV. What often happens though is that we have decent SKU's that has good or high value, but just doesn't move as quickly as we'd like. This is often true for "long tail" or niche-like SKU's in your catalogue.
Instead of eliminating these products completely (because they still contribute to revenue, as well as downstream effects like LTV & AOV), you can consider either reducing the number of units you hold or if you want to be aggressive, you can move to only selling this products on an on-demand basis. The benefit of this is that you don't lose the sale and you don't have to hold the inventory (freeing up working capital and cash).
What this means is that you need to proactively and transparently communicate to your customers that they are (pre-)ordering a product that is on demand and that the delivery time will be longer than that of other SKU's.
Wayfair implements this strategy to great success and quotes from their 2019 annual report: "We are able to offer this vast selection of products because we hold minimal inventory.
6.) Loss Leader
Wayfair implements this strategy to great success and quotes from their 2019 annual report: "We are able to offer this vast selection of products because we hold minimal inventory."
This is a good tactic for a SKU that has decent value and velocity, but is not shooting the lights out. When implemented optimally, two things should happen :
- The velocity of loss leading SKU's should increase (whilst value decreases).
- The value and velocity of other (complimentary) SKU's should increase.
Here's a few of my favourite resources about how to use a loss leading strategy: