What is Holding cost?

For a small Shopify store, holding cost is the hidden price of buying too much. Every dollar sitting in boxes of candles or extra apparel sizes is a dollar that could have paid rent, ads, or a different product that sells faster.

Use holding cost to decide how much extra stock is worth carrying. If the cost to hold an item for a year is high relative to its price, you want to order smaller amounts more often rather than stockpiling.

Formula

Example

A candle store carries average inventory worth $10,000 across the year. Storage, insurance and the cost of tied-up cash together equal 20% of inventory value per year. Holding cost = $10,000 x 0.20 = $2,000 per year. If the store cuts average inventory to $6,000 by ordering smaller batches more often, holding cost drops to $1,200.

Common mistakes

• Counting only storage rent and ignoring the cost of cash tied up in stock.
• Using one holding cost rate for every product when fragile or perishable items actually cost more to hold.
• Ignoring holding cost when deciding order quantities, which leads to over-ordering just to get a supplier discount.

Holding cost and SteadyShelf

SteadyShelf suggests order quantities rounded to case packs based on forecasted sales, which helps you avoid ordering more stock than you need and racking up holding cost.

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

Carrying cost · Economic order quantity · Excess inventory · Safety stock · Overstock

Full inventory glossary

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