Are you a retail veteran or preparing to open your first business? Do you have a massive inventory of multiple products, or keep your stock limited and specialize in just one product? Do you have a brick-and-mortar or an online marketplace? No matter your answer, you likely have a SKU architecture in place — or you’re looking to add one.
A SKU helps to track a specific product. But what they might not know is how it works behind the scenes. So, first, what even is a SKU and what does it do?
What Is a SKU?
A SKU, or Stock Keeping Unit, is a unique number used to internally track a business’ inventory. SKUs are alphanumeric, and should provide information on the most important characteristics of a product — price, color, style, brand, gender, type, and size, for example. This information in the SKUs should also be placed in order from important to least important — or in other words, the most needed information to the least.
SKUs also aren’t universal. They’re meant to be unique to your business, and can be tailored to represent what your customers or vendors ask the most about your store’s merchandise.
How Are SKUs Used?
Retailers use SKUs to track their inventory and sales, which can provide analytical data that are beneficial to have in order to develop relationships with your vendors and customers. But, remember: Each retailer won’t be tracking the same thing — so it’s important that you examine your business’ specific needs before you create your SKU architecture.
So, how do you create a SKU architecture for your business? Follow these simple steps:
- Ask yourself about the size of your stock: If it’s minimal, you may want to create an architecture that tracks customer type, such as adult, babies, kids, etc. If your stock is on the larger side, you may want to continue to break down the product’s traits after customer type to provide additional details on the product, like this:
type > gender > size
- Ensure the number sequence is unique: If your SKUs mirror something such as a manufacturer SKU or were duplicated for different products, you might be prevented from accurately tracking your inventory.
Here are a few things to remember for your naming pattern:
- Stay between 8 and 12 characters
- Begin the number with a letter
- Never use zero
- Keep the format easy to understand
- Ensure each letter and number has a meaning
- Keep the customer in mind: You’ll also want to remember what’s important to your customer about your merchandise. Do customers frequently ask about color? If so, you’ll want to keep the number that represents color at the beginning of your SKU so you can quickly provide your customers with the information they desire.
- Choose your inventory system: If you use a point-of-sale system, most will allow you to create a SKU architecture within it. If you don’t have one and have a smaller inventory, you can actually create it by hand and on an as-needed basis. Or, you can use an online generator such as Primaseller or TradeGecko to help with the process.
What’s the Difference Between SKUs and UPC codes?
Ever wondered what those two seemingly identical lines of numbers on the back of a product really are? In most cases, those sequences of numbers are a product’s SKU and UPC code. While they look similar, they actually do two different things.
Here’s the breakdown to help you remember:
SKU (Stock Keeping Unit)
UPC (Universal Product Code)
If you’re a new business that still needs barcodes for your merchandise, visit GS1’s starter guide to creating barcodes and UPCs to sell your products in stores and online.
You always want to make sure that your SKUs and UPC codes are not the same, too. Here’s a quick rule of thumb: Let your SKU identify the product traits, and the UPC code to identify the manufacturer (first six numbers), item (next five characters), and check digit (last number.) The check digit is formulated by adding and/or multiplying multiple digits in the code to show that the UPC code is valid.
How to Use SKUs to Boost Your Business
1. Track Inventory Accurately
Since SKUs are used to track product traits, they can be used to ensure your inventory is accurately tracked overall. This leads to one of the most important traits to track: availability. When you can continuously keep track of your products’ statuses, your SKU architecture can help you pinpoint when exactly to order new products so your merchandise never goes out of stock. This is referred to as a retailer’s “reorder point.”
And, most importantly, with accuracy comes efficiency and productivity. When you can keep track of your products in real time, it can help you better understand the evolving needs of your business.
FURTHER READING: Learn more about how to create an inventory management system that scales with your retail business.
2. Forecast Sales
When you can keep accurate numbers on your inventory, SKUs also help to forecast sales so you can anticipate your business’ needs. As a result, you can more easily keep your products in stock, which in return designates you as a reliable merchant to your customers and even vendors.
But it’s important to note first that when using SKUs to forecast sales, you’ll want to be more strategic before completely eliminating slow sellers from your stock. Some of your important customers may still want those products — and if you stop selling them, they may take their business elsewhere that does.
In 2008, Walmart created an initiative called Project Impact, where they kept the store’s highest selling products, removed the lowest sellers, and added in pricier items. The result? A quick decline in sales because customers did, in fact, look to other retailers.
However, there is a solution that involves your SKU architecture. According to the Harvard Business Review, you may want to consider how customers are purchasing your products.
“Most of the time customers don’t buy products; they buy a bundle of attributes,” Marshall Fisher and Ramnath Vaidyanathan, the article’s authors, write. “Think about the last time you bought a TV. Did you say, ‘I want TV X’? Or did you think about screen size, resolution, price, LCD versus plasma, and brand?”
By structuring your SKU architecture to provide the information customers really want to know about your products, you can more strategically analyze your products in a way that helps you make important (and smart) decisions regarding your store’s ever-changing inventory.
3. Make the Most Out of Your Biggest Profit Generators
Again, your SKU architecture can help you understand what your business’ most sought-after items are — and the least desired ones, too. Aside from knowing when to reorder and which items to take out of the inventory, did you know you can get even more creative with your highest-selling items — and maybe get them out the door faster?
By knowing what your business’ biggest profit generators are, you can make strategic product displays, ensure they’re easily accessible on your online store’s landing page, and it goes without saying, keep them always in stock.
PRO TIP: If you have a brick-and-mortar and want to play around with strategically placing your top profit generators around your store, take a page out of our book and follow our visual merchandising tips.
4. Boost Customer Loyalty and Satisfaction
Since SKU architectures can be used to anticipate reorder points, you can help your customer always find the product they sought out to purchase. And when you’re able to track reorder points, you can create a shopping experience with minimal out-of-stock statuses — which can result in an increased brand loyalty and satisfaction among shoppers.
Plus, when a product actually becomes out of stock, your customers might be more willing to be patient rather than taking their business elsewhere.
FURTHER READING: Learn how you can create more customer loyalty with a loyalty program.
5. Offer Customers New Suggestions
If you’re tracking multiple product characteristics through your SKU architecture, this type of information isn’t only limited to stock and sales analysis — it can be also applied on the sales floor. If a product is out of stock, you can use your SKU knowledge to direct your customer to a similar product.
This can be utilized online, too. Think of all the shopping websites you visit. When you click a certain item, the page usually includes similar items you may like. This is likely done through a retailer’s SKU architecture — where they’ve applied an algorithm to provide suggestions with similar SKU features.
Moving Forward With Your Own SKU Numbers
Again, SKUs aren’t a one-size-fits-all for retailers and the more you tailor your architecture to your specific needs, the more you’ll set your business up for success.
Just remember: Know what’s important for you, your vendors, and your customers. Then you can begin the process of creating a SKU architecture that allows you to manage your business’ inventory effectively while understanding how to grow and adapt to the ever-evolving needs.