What is Carrying cost?

Carrying cost tells a store owner what it actually costs to keep stock sitting on a shelf. Many small store owners only look at what they paid a supplier and forget that unsold inventory also costs money every month it does not sell.

Use carrying cost to decide how much extra stock is worth holding. If carrying cost is high, ordering smaller amounts more often usually beats buying in bulk, even if the per-unit price is a bit higher.

Formula

Example

A candle store has $10,000 worth of inventory sitting in a storage unit. Rent allocated to that stock is $100 a month, insurance is $20 a month, and the owner estimates $30 a month in capital cost and occasional damage. That is $150 a month, or $1,800 a year, which is 18% of the $10,000 inventory value. So every $1,000 of candles sitting unsold costs about $180 a year just to hold.

Common mistakes

• Only counting the purchase price and ignoring storage, insurance, and tied-up cash.
• Using one carrying cost number for all products instead of accounting for items that spoil, go out of season, or get damaged more easily.
• Forgetting that carrying cost keeps adding up the longer stock sits unsold, not just a one-time fee.

Carrying cost and SteadyShelf

SteadyShelf helps lower carrying cost indirectly by forecasting demand per variant and suggesting order quantities sized to that demand instead of guesswork, so you order closer to what you will actually sell.

Work it out for your own products with our free tool: Inventory carrying cost calculator.

SteadyShelf is launching on the Shopify App Store. Join early access to get the install link first.

Related terms

Holding cost · Excess inventory · Inventory turnover · Economic order quantity · Dead stock

Full inventory glossary

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