What does "lost sales" mean?

Lost sales are those selling opportunities that you have lost because an item was out of stock or because you do not carry a particular brand or line of merchandise or any other reason that caused you to lose the opportunity to sell.

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Lost sales is the difference between actually sold items and potentially sold items, i.e. how many more items you would sell under different circumstances.

In the sentence, the difference is due to the quality of the product. If you sell a product with a lower quality, fewer will buy it. Improving the quality would give an increase in sales.