In eCommerce, both product advertising and inventory management play vital roles in the health of a company. Often these vital components are treated as separate processes, but companies have a lot to gain from unifying their product advertising and inventory management operations.
Companies with both physical and online operations are quickly seeing the gap between the two close as processes become more unified. Traditionally, when you want to move inventory, there are a number of merchandising strategies at your disposal. However, companies often overlook how their online product advertising could serve a similar purpose.
Forward-thinking companies can use their online product advertising to help them move excess inventory. Basically, this method includes increasing advertising on overstocked products to help them sell more quickly, or reducing advertising on understocked products that can sell well without an advertising push.
Let’s take a more in-depth look at some of the specific ways in which product advertising and inventory management are beginning to converge in eCommerce:
Connecting Product Advertising and Inventory Management
Bridging the gap between product advertising, merchandising, and inventory management can have a huge impact on a business. Typically, advertising funds are spent on the products that generate the largest returns. That’s been a standard advertising practice for decades. But, that doesn’t necessarily mean that your advertising budget is being spent on the right products. By pairing your product advertising and inventory management you can focus on advertising products that have the biggest positive impact on the business as a whole, instead of the products that are easiest to sell.
eCommerce companies that embrace this union will find that they are more efficient at managing their inventory. Sometimes, products may sell well online, but don’t need to be advertised for the current stock to sell out. Product advertising must take stock levels and turnover rates into account. Advertising something that is going to quickly run out of stock often provides little to no net benefit. At the very least, companies should open the lines of communication between the two departments so that they can begin working together to find optimal inventory balance.
Data silos and misused metrics between the advertising and merchandising departments can waste large amounts of money. In a guest article from our founder Andreas Reiffen on Search Engine Land, he details how 40 percent of ad budgets are spent on products that will run out of stock within three weeks. On the other hand, only 21 percent of budgets are allocated to products that will not sell out within a three-month period.
While it may seem advantageous to focus on returns in product advertising, the bigger picture that includes inventory management shows that companies may want to re-think the product advertisements that they pay for. Moving products that would otherwise be sitting on shelves is a net positive, while moving products that were sure to sell on their own provides little benefit, regardless of individual returns.
Why Focusing on ROAS Is Counter-Productive
Product advertising success has long been dominated by one metric, Return on Advertising Spend (ROAS). This is a measurement of the total revenue created after advertising costs have been subtracted. While ROAS is an important metric (although not as important as Lifetime Value, as we pointed out in a previous blog post), it is not the best long-term choice. Shifting your focus toward lifetime value can help companies change their way of thinking from short-term gains to long-term growth.
Customer lifetime value (CLV) is ideal for measuring the long-term contribution of your advertising budget, while ROAS focuses primarily on the profitability of a specific advertisement. ROAS doesn’t take into account future purchases that a customer will make once they have become familiar with your company. The goal should always be to improve measurement and gain a deeper understanding
Our research shows that advertisers that focus their efforts on long-term revenue goals make about 5 percent more revenue in the first year than those focusing on short-term goals.
When ROAS is the only thing taken into account when deciding what products to advertise, inventory problems can arise. Advertising a product with low inventory just because it has the best ROAS can cause stock shortages. This can actually result in a net loss for the company when they don’t have the product on hand for future customers. Often it is more beneficial to advertise products that have a poor sell-through rate, as they need the most help to move your inventory. If a product was going to sell out without advertising in a few short weeks – why focus your ad dollars on that product?
Using Dynamic Pricing to Manage Inventory
In a previous post, we covered dynamic pricing. In that post, we covered how dynamic pricing can be used as an effective tool in inventory management Having dynamic pricing systems in place allows companies to quickly react to changes in inventory and roll pricing changes out across all channels.
With automation, your product prices can automatically react to changes in inventory. In fact, A.I. will allow for your dynamic pricing systems to react weeks ahead of time, averting potential shortages and other inventory crises’ that would have been difficult to manage.
As the inventory of a particular item begins to fall, companies can increase prices to reflect this fact and ensure that there are no item shortages. When an item has been overstocked, pricing can be lowered to ensure that the inventory is sold at a reasonable rate. If more storage space is required, larger items can be sold to open up more warehousing space. In the long run, dynamic pricing strategies in product advertisements can give eCommerce companies helpful tools for improving their inventory management operations.
A New View on Product Advertising
For product advertising to become an effective tool in inventory management, organizations need to change the way they think about advertising. For decades, the only metric that advertising was judged by was its return. If an advertisement generated a net positive return, it was seen as beneficial regardless of the wider organizational implications that giving the product an advertising push may have resulted in. Often, it may be more beneficial to ensure that slow-selling products receive an advertising push but generate a lower return.
Of course, this requires communication and collaboration between departments. Without that communication, it is impossible for marketing and advertising departments to know what changes need to be made to facilitate improvements in merchandising and inventory.
Beyond the inventory improvements, these changes facilitate a long-term view of product advertising and a focus on CLV over ROAS, which will provide better results. The next time that you set up a meeting with your ads team, considering bringing in inventory managers to discuss how the two can work together to create processes that benefit both departments.
Get in touch to learn more about how Crealytics can help you break down the silos between Product Advertising and Merchandising to achieve a more unified eCommerce strategy.