Excess inventory is inventory that a business has in stock that it is unable to sell or that it no longer needs.
This can happen for a variety of reasons, such as overproduction, changes in demand, or a shift in a company’s product line.
Every successful eCommerce business must maximize revenue while also minimizing the costs of holding the inventory. But simply selling excess inventory en masse isn’t as straightforward as you might think.
Market perception introduces another layer of complexity. Steeply discounting products that you want to sell may devalue your brand or condition your customers to expect low prices as the rule, not the exception.
In this blog post, you’ll learn about:
- The relationship between holding costs and revenue
- How selling excess inventory items affects market psychology
- What your inventory turnover rate is (and why it’s so important)
- Practical techniques for selling excess inventory items while still making a profit
Let’s dive in!
What is excess or surplus inventory?
Excess or surplus inventory refers to a scenario in which a business has more inventory than it needs or can sell.
This can happen for a variety of reasons, such as overproduction, changes in demand, or a shift in a company’s product line.
(Also, if you’re operating with a poor inventory management system or without dedicated inventory management software, holding excess stock will likely be a recurring issue.)
When a business has too much inventory, it can create a number of problems, including increased storage costs, decreased cash flow, and reduced profitability.
Another issue that can arise with excess inventory is obsolete inventory. Obsolete inventory refers to products that are no longer in demand or are out of date.
This often means it’s much more challenging to find buyers and the inventory may need to be sold at a significant loss.
What does it mean to liquidate inventory?
Liquidating inventory means selling off products or goods in large quantities, often at a discounted price, in order to quickly convert them into cash.
This strategy is often used by businesses when they have excess inventory that they need to move to free up storage space or generate cash flow.
If you remember the business Toys R’ Us, you may have seen signs in their store windows: “LIQUIDATION SALE, 50% OFF, EVERYTHING MUST GO.”
You’ll often see a failing business liquidate excess inventory as a death rattle; a desperate attempt to turn their inventory into cash before the organization’s inevitable demise.
However, it’s not always the case, as many eCommerce businesses will run liquidation sales simply to free up storage space and eliminate holding costs.
But liquidating isn’t without its challenges and pitfalls, as we’ll explore later in this post.
Why is it so important to sell excess inventory?
It is important to sell excess inventory because holding excess inventory can have many negative consequences for a business if left unaddressed.
Managing inventory is a critical aspect of running a successful business, and excess inventory can lead to a variety of issues, such as increased storage costs, decreased cash flow, and reduced profitability.
Let’s briefly take a deeper look at each of these.
Increased storage costs
When a business has excess inventory, it must find a place to store it. Common sense, right?
This often means renting additional warehouse space, which can be expensive. Another scenario, and probably one more likely in smaller eCommerce businesses, is that excess stock occupies shelf space that could be occupied by more profitable or high-selling products.
This creates a sort of “hidden holding cost” associated with hanging onto excess inventory. It may not be as visible on your financial statements, but it’s an opportunity cost that’s hurting the profitability of your business.
Decreased cash flow
When a business has excess inventory, it ties up cash that could be used for other purposes. For example, if a business has significant cash tied up in excess inventory, it may not have enough money to invest in new products or marketing initiatives.
Or, in an even worse scenario, you may not have enough cash flow to fulfill your purchase orders of products that actually do sell!
This creates a vicious circle of unprofitability through not being unable to sell excess inventory while also not being able to purchase the inventory you really need to increase your cash flow.
Excess inventory can reduce the profitability of a business in several ways. First, it ties up cash that could be used for other purposes, as discussed above.
Second, holding excess inventory can increase the cost of carrying inventory, as businesses may need to pay for additional storage space, insurance, and other related expenses.
Finally, if excess inventory is not sold, it may become obsolete or outdated, reducing its value and potentially leading to a loss.
For example, let’s consider the example of a small, brick-and-mortar store that sells electronics.
Let’s say the store orders a large quantity of a particular smartphone in anticipation of high demand. But since the company wasn’t using inventory management software, the increased demand was based on the gut feeling of the owner, not real data.
As a result, the store was left with a surplus stock of smartphones that were taking up valuable storage space.
The excess inventory created several problems for the store:
- First, the store had to rent additional storage space to hold the excess smartphones, increasing their storage costs.
- Second, the excess inventory tied up cash that the store could have used for other purposes, such as investing in new products or marketing campaigns.
- And since the store operated in the fast-moving industry of consumer electronics, the smartphones quickly became obsolete, leading to a net loss to the business.
How to sell excess inventory (without devaluing your brand)
So we’ve thoroughly explored the issues with holding onto surplus inventory. But how exactly do you get rid of excess stock without devaluing your brand and still turning a profit?
Here are some best practices and tips:
Use intelligent discount strategies
Product pricing is 10% logistics and 90% human psychology. The way humans respond to discounts is fascinating, and will likely continue to be studied for years to come.
Steeply discounting products may set a precedent or seemingly undervalue your products. It’s hard to walk that line between customers saying, “This is such a great deal!” and “Why is this so cheap? There must be a catch.”
Here are some practical strategies should you choose to go the discounting route:
Offer discounts to loyal customers
Offering discounts to your most loyal customers can help you sell excess inventory while also strengthening customer loyalty. Consider offering exclusive discounts to customers who have purchased from you before or who are members of your loyalty program.
Bundling products together can be an effective way to increase their perceived value and make them more attractive to customers. For example, you could bundle the excess inventory with other products that are selling well or offer a discount for customers who purchase multiple items.
Be strategic with timing
Timing is important when offering discounts. Consider offering discounts during slow sales periods or during times when customers are more likely to be looking for deals, such as during holiday shopping periods.
Avoid deep discounts
While offering discounts can be an effective way to sell excess inventory, it’s important to avoid deep discounts that could devalue your brand or lead to lower profits. Stick with offering moderate discounts that still allow you to make a profit on the sale.
Partner with other businesses
Partnering with other businesses that sell complementary products can be a win-win situation.
When you discount your products to your existing customers, you may set a precedent for cheaper products in the future or devalue your brand.
After all, you’ve trained them to expect products at a certain price.
However, when you discount surplus inventory as part of a one-time partnership with another brand, you can clear excess inventory while also tapping into another audience that is ignorant of your previous pricing strategies.
Thus, you don’t run the risk of subverting customer expectations, and you’re still getting rid of excess inventory by selling it at relatively competitive prices.
Donate your slow-moving inventory
If selling your excess inventory is not possible or practical, consider donating it to a charitable organization. This can help reduce the cost of holding the inventory and generate positive publicity for your business.
Here are some practical steps should you choose to go this route:
Choose a reputable charitable organization
Choose a reputable charitable organization that aligns with your values and mission. Research potential organizations to ensure that they have a good track record of using donations effectively and efficiently.
Determine the value of the donation
Determine the value of the excess inventory that you’re donating. You may be able to take a federal income tax deduction for the value of the donation, so it’s important to document the value of the inventory accurately.
Be sure to consult with a tax professional to ensure that you’re following all applicable rules and regulations.
Arrange for pickup or delivery
Arrange for pickup or delivery of the excess inventory to the charitable organization. Be sure to coordinate with the organization to ensure they have the capacity to receive and process your donation.
Note that many organizations or donation centers will gladly cover the expenses of picking up and transporting donated products.
Promote the donation
Promote the donation on your website, social media channels, and in-store signage. This can help build goodwill with customers and demonstrate your commitment to social responsibility.
Follow up with the charitable organization to ensure that they have received and processed your donation. Ask for a receipt or other documentation that you can use to support your tax deduction, if applicable.
Be transparent about the reason for the sale
This is a highly underrated, but somewhat controversial tactic. Many older, larger businesses will likely balk at this suggestion.
But think about it: today’s business (especially small business) is often just as tied to the business owner as it is to the product itself.
Business owners tell their stories on social media, document their life on Instagram reels, and often blur the lines between their work and their personal lives.
This, while being a fairly new phenomenon, is one of the most powerful and effective ways to create loyal customers.
Why? Today, there are no barriers between business owners and business consumers. Both can freely interact on social media, create parasocial relationships, and even become real-life friends.
This is the difference between buying a product from a boutique skincare business owner who shares her life story on Instagram and a nameless, faceless corporation.
All this to say, if you have this kind of relationship with your audience, they may resonate better with just a straightforward, transparent call to purchase.
Just be honest: tell them you’ve got excess or inventory and need to clear them out. Couple the call-to-action with a slightly lower price and that may be all a loyal customer base needs to hear to buy up your old inventory.
Customers appreciate honesty and may be more likely to support your business if they understand the reasoning behind the sale.
FAQs about selling excess inventory
How do I determine the value of excess inventory?
Determining the value of excess inventory is important for several reasons, including compliance with tax regulations, accurate financial reporting, and effective inventory management.
There are several methods that businesses can use to determine the value of excess inventory, including:
This involves valuing inventory based on the cost to acquire or produce it. The cost method is a simple and straightforward approach to valuing inventory but may not reflect changes in market value or changes in demand.
Market value method
This involves valuing inventory based on the price at which similar goods are currently being sold in the market. The market value method is useful for valuing inventory that is subject to rapid changes in demand or supply but may not reflect the true value of unique or specialized goods.
Net realizable value method
This involves valuing inventory based on the estimated selling price, less the estimated cost to sell.
The net realizable value method takes into account both the cost of the inventory and the expected revenue from selling it, making it a more accurate method for valuing inventory.
It’s important to consult with a tax professional to determine which method is appropriate for your business and to ensure compliance with tax regulations.
What is inventory turnover ratio (and why is it so important?)
Inventory turnover ratio is a financial metric that measures how quickly a business is able to sell and replace its inventory within a given period of time. It is calculated by dividing the cost of goods sold by the average inventory value during the same period.
A high inventory turnover ratio indicates that a business is effectively managing its inventory and selling products quickly while a low inventory turnover ratio may indicate excess inventory and slow-moving products.
Inventory turnover ratio is important because it can help businesses determine the effectiveness of their inventory management strategies.
By tracking this metric, businesses can identify trends in customer demand, adjust purchasing and sales strategies, and avoid overstocking or stockouts.
For example, a low inventory turnover ratio may indicate that a business has excess inventory that needs to be sold quickly to free up valuable storage space and generate cash flow.
How often should I review my inventory levels to avoid excess inventory?
Reviewing inventory levels regularly is an important part of effective inventory management. The frequency of these reviews will depend on the nature of the business, but businesses should aim to review inventory levels at least quarterly.
(Check out our post on cycle counting for more information on conducting intelligent inventory audits.)
However, businesses in industries with rapid changes in demand or supply may need to review inventory levels more frequently.
Regular inventory reviews can help businesses identify trends in customer demand, adjust purchasing and sales strategies, and avoid overstocking or stockouts.
By reviewing inventory levels regularly, businesses can optimize their inventory levels, reduce costs associated with holding excess inventory, and position themselves for long-term success.
How can I prevent holding excess inventory?
As with most things in life, prevention is the best medicine. And the best way to prevent holding excess inventory is by implementing inventory management best practices and inventory management software in your organization.
Inventory management software, such as SkuVault Core or Linnworks, can help businesses track inventory levels in real time, forecast demand, and optimize purchasing and sales strategies. SkuVault Core has many features that can help business owners avoid the issue of holding excess stock, such as:
Real-time inventory tracking
SkuVault Core enables businesses to track inventory levels in real time, giving them a clear picture of how much inventory they have on hand and how quickly it’s selling.
SkuVault Core uses historical sales data and other factors to forecast demand, helping businesses adjust their inventory levels and purchasing strategies accordingly.
SkuVault Core can automate the replenishment process, ensuring that businesses always have enough inventory on hand without overstocking.
Reporting and analytics
SkuVault Core provides businesses with detailed reporting and analytics on inventory levels, sales trends, and other key metrics, helping them make informed decisions about inventory management.
By using inventory management software like SkuVault Core, businesses can prevent excess stock and optimize their inventory levels, reducing costs associated with holding excess inventory and improving overall profitability.
To learn more about how SkuVault Core can help prevent excess stock and improve inventory management, click the link on this page for a live demo or visit the SkuVault Core page to learn more.