Stockout cost is the total economic loss incurred when a customer wants to buy an item and you don't have it — the sum of lost margin, emergency procurement premiums, and long-term customer defection, expressed per stockout event or as an annual dollar figure.
Quick answers
What is stockout cost? Stockout cost is the full financial impact of an empty shelf: the immediate lost sale, the premium you pay to rush-replenish, and the lifetime value erosion from customers who leave and don't come back. It is often larger than the lost sale alone suggests.
What is the stockout cost formula? stockout cost per event = lost margin + emergency premium + (defection probability × customer lifetime value). For annual planning: annual stockout cost = stockout events × average cost per event.
How does stockout cost relate to safety stock? Safety Stock is the economic defense against stockout cost. The optimal safety stock level is the point where the marginal cost of holding one more unit equals the marginal cost of one more stockout.
What's a typical stockout cost? A practical planning range is 2–5× the item's gross margin per event once customer defection and emergency replenishment are included. A $12 item with $5 margin may carry $15–$25 in total stockout cost when you account for lost future visits.
The formula
stockout cost per event = M + E + (P_d × CLV)
where:
- M — lost gross margin on the missed sale
- E — emergency procurement premium (rush shipping, spot-market pricing, or substitution cost)