3.3 Stock Outs and Seller’s Market

What happens when a product generates high demand but stocks out? The unmet demand is divided between the remaining products in proportion to their customer survey scores. This could happen in any month. To assist with diagnosing stock outs and their impacts, see the Market Share Report on page 10 of the Capstone Courier.

Usually, a product with a low customer survey score has low sales. However, if a segment’s demand exceeds the supply of products available for sale, a seller’s market emerges. In a seller’s market, customers will accept low scoring products as long as they fall within the segment’s rough cut limits. For example, desperate customers with no better alternatives will buy:

• A product positioned just inside the rough cut circle on the Perceptual Map– outside the circle they say “no” to the product;
• A product priced $4.99 above the price range– at $5.00 customers reach their tolerance limit and refuse to buy the product;
• A product with an MTBF 4,999 hours below the range– at 5,000 hours below the range customers refuse to buy the product.

Watch out for three common tactical mistakes in a seller’s market:

1. After completing a capacity analysis, a team decides that industry demand exceeds supply. They price their product $4.99 above last round’s published price range, forgetting that price ranges fall by $0.50 each round. Demand for the product becomes zero. They should have priced $4.49 above last year’s range.
2. A team disregards products that are in the positioning rough cut. These products normally can be ignored because they have low customer survey scores. However when the team increases the price, the customer survey score falls below the products in the rough cut areas, which are suddenly more attractive than their product.
3. The company fails to add capacity for the next round. Typically a seller’s market appears because a competitor unexpectedly exits a segment. This creates a windfall opportunity for the remaining competitors. However it is easy to demonstrate that a company should always have enough capacity to meet demand from its customers. (Consider the question, “What happens to price if every competitor has just enough capacity to meet demand from its customers?”).

How can you be sure of a seller’s market? You can’t, unless you are certain that industry capacity, including a second shift, cannot meet demand for the segment. In that case even very poor products will stock out as customers search for anything that will meet their needs.