The Art of Inventory Optimization, Part 1: A/B Testing

Inventory optimization can be challenging at times. Even seasoned Purchasing Managers can struggle with deciding what products to order, but there’s a proven tactic that’s helping everyone from software designers to laundry detergent manufacturers. 

“A/B Testing” is driving business decisions for large and small companies alike. It’s simple to understand and easy to implement. A/B testing is a system that can be applied to any aspect of business, or life in general for that matter.

What is it?

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At its core, A/B Testing is simply trying out two different approaches to reach the same goal, then measuring the results. So, let’s set a goal and say “I want to make more profits from this item by just changing the price”. Then, we can set up two hypotheses to test. The first theory is, “raising the price by 10% will increase profitability without affecting sales”. The second theory is, “raising the price by 20% will negatively affect sales, but the increased margins will more than make up the difference”.

We’ll set up the A/B Test and run the item for a couple of weeks at Price A and a couple of weeks at Price B. Then I review the data to find out the key question: Does Price A perform better than Price B for sales and profits on this specific item? 

We can apply the same approach to decide whether it’s time to stop carrying an item. If I have two similar items and limited shelf space, I need to know which of the two is worth re-ordering and which one isn’t. Think of it like an ongoing ‘tournament’ within your inventory and the winner is the one that adds to the bottom line.

When it comes to inventory management, an ethos of A/B Testing will ensure you are always in sync with your customers, and your products are optimized to sell at the ideal price point.

What does it look like?

For example, let’s say I sell water bottles. One is a fancy, upscale branded water I can sell for $3.99, one is a mid-range brand which sells for $1.99, and then there’s the bargain basement local brand which goes for $.99. There’s a lot of room for A/B Testing here. The key is to ask the right questions, like:

What happens if I remove the mid-range option? Do I sell more upscale or more local? How is my overall profit affected?

What happens if I raise the price of the upscale? Does it still sell just because it’s the ‘premium’ option?

Of course, you can take that approach and run even further with it (although you don’t want to get carried away). A/B Testing lets you get granular:

What if I remove the Local option, or price it closer to the mid-range?

What if I lower the prices for all three and focus on volume over margin?

What if I sell one at a loss; does it bring in more customers who then buy other items?

Each of these questions has an answer that can be provided by A/B testing. Some are simple and easy to set up, some more complex. Ultimately, those answers will get me to the holy grail of inventory optimization: How can I order the right products and make the most possible money with the inventory I have on my shelf? Answer that, and your business is ahead of the game. 

How does this help my business?

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A/B Testing pits products against each other to eliminate low-margin, slow-moving items and maximize the profits on the items you do sell. It’s not just about raising or lowering prices, it’s analyzing your inventory as a whole.

Shelf space is a precious commodity. A product should have to earn its spot in your inventory. If sales for one product go down, it may be time to A/B test it against something else and see who gets their contract renewed and who gets voted off the next purchase order. 

It also gives you the freedom to experiment. If you’re taking a risk on a new item, you can know whether that risk paid off in outperforming the inventory that was already there.

At the other end of the spectrum, you can use A/B testing to professionalize your price discovery. You can say with confidence, “Month A was at this price, and Month B was at that price, and we ended up making more on that item during Month B. Month B’s price wins.”

The analytical process is as simple as bringing up the total profit numbers for A and B and analyzing the profit margin per item relative to how many items I sold.

That’s all well and good, but how do I get this data without spending hours on it? 

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This is where software comes into play. Most businesses really don’t have the budget to have a professional statistician on the payroll to help optimize sales. But having a robust software option is a must for gathering and analyzing the data you need. 

We’ve worked with merchants all over the world here at Shopventory, and it’s one thing we see over and over. Data-driven decisions make businesses more profitable, period. 

Whether it’s a warehouse with 10,000 SKUs or a corner retail store with a few hundred items, an optimized inventory provides a serious edge, and Shopventory gives you the data you need to make the best decisions on stocking and pricing. So you can let your competitors sell the stuff nobody wants at the wrong price at the wrong time of year in the wrong part of their stores. 

With a few A/B tests, and Shopventory providing the results along the way, you can get the right data in seconds instead of hours and make moneyball decisions with confidence. Oh, and did I mention Shopventory plans start as low as “Free”?

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Shopventory offers a 30-day full-feature free trial of our service. Shopventory is even backed by a 30-day money back guarantee. That means you get a total of 60 days risk-free!

You can start a trial now with no credit card required! Thousands of merchants trust Shopventory to help them grow their business and we can do the same for you. Shopventory means better inventory management and optimization - guaranteed!

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