Retailers normally use SKUs to identify and track their store’s inventory. Most retailers know the importance of using SKUs to manage inventory in their supply chain from provider to shopper. But not all retailers know how to calculate and improve SKU productivity and why it’s important.
While you may think stocking a huge product assortment is the best way to expand your business and meet customer demand, doing this is often counterintuitive. Growing your product assortment too quickly can result in unhealthy SKU productivity and negatively impact your business’s profits.
Read on to learn why SKU productivity is important, how to calculate it, and how you can improve your metrics.
What is SKU productivity?
SKU (stock keeping unit) productivity is when retailers evaluate the effectiveness of their product assortment. It's also termed as SKU rationalization. Usually, they factor in strategic, financial, and customer expectations to get the full picture.
Every retail business will have different goals when it comes to each of these expectations.
For that reason, there’s no one right answer –– each retailer sets a threshold for what they consider SKU productivity. This threshold depends on their business structure.
For example, retailers will often evaluate if inventory should be shared to support omnichannel, or should it be distributed to support an exclusively online strategy or physical store. In most cases, retailers need to find a middle ground strategy.
Retailers also need to consider the work that’s required to merchandise a product on a website (even using dropship). Sometimes having a large assortment of products can be a case of too much too soon.
For example, too many products can affect search, burden site taxonomy, create more work to create more taxonomy, as well as the ongoing need to update filters (like price, color variants etc).
Alternatively, too few product variants can make it hard to meet customer demand. Customers may want to purchase items in a different color or size, but you may not currently offer them.
It can also be a measurement of how many customers purchased a SKU as well as how many new customers were obtained with a SKU.
How do you calculate SKU productivity?
It’s simple to calculate SKU productivity. Identify the number of SKUs live on your site, in a specific period (eg. 12 months rolling) and the number that had a sale of >$1 (minus returns).
For example, let’s say you own a retail store that stocks iPhone cases. Between June 2021 and June 2022, you had 1000 different types of iPhone cases (your SKUs) live on your site. Out of these, you sold at least 400 different SKUs. The number of SKUs you sell is your SKU productivity (40%).
It’s important to net your sales before calculating SKU productivity. Net sold is the number of gross SKUs sold minus returned SKUs. The product may not be productive after returns.
Comparing this throughput to your total number of live SKUs can give you a clear idea of how effective your product assortment is.
Why is SKU productivity an important metric for retailers?
Tracking SKU productivity helps you evaluate what kinds of products sell well on your site. Knowing this should lead to better decision-making. In the future, you can stock more similar product types that sell well and better allocate your resources.
Here are the top reasons why retailers should track SKU productivity.
Keep your product selection relevant
There’s such a thing as having too much product choice. By stocking all product options, you may inflict “choice paralysis” among your customer base. Instead of opting for the product they came to buy, they may see all the items you have available and stall in their decision.
The faster retailers can test SKUs, or swap out a low-performing SKU with a new SKU from a different brand, the healthier and more relevant your marketplace will be.
Better allocate your team resources
Uploading product descriptions, images, and other content is a time-consuming task. Asking your content team to constantly add products can become a burden –– especially if they don’t create a sale.
Most retailers have limited capacity to add new products to their site, so it’s important to choose your products carefully. To optimize your content team’s resources, prioritize adding new items that are most likely to result in sales.
It used to take between two and four months to onboard a single vendor and their assortment. But now with platforms like Convictional, it can take just two to four clicks (or 15 minutes). It’s important to be able to efficiently onboard all the brands you need to quickly. If you’re not able to offer fast onboarding, it will take longer to start shifting those SKUs and figure out what works for your ecommerce store.
Optimize your storage space
If you use warehouses to store your products, inventory storage will be a large overhead cost for your business. By measuring your SKU productivity you can optimize your storage space.
Instead of filling up a large warehouse and having little space to store other products, you can focus on holding products most likely to sell quickly.
Calculating your SKU productivity also shows you those products that didn’t sell as well as you’d hoped. Identifying those products that sell less frequently will help you decide whether you want to stock them at all or if you’d prefer to use your storage space for more popular items.
Knowing your SKU productivity can also help you determine when to partner with a dropship vendor. Teaming up with a dropship vendor means you can keep less productive SKUs live without the inventory risk.
Lower your operating costs
Without knowing the approximate assortment of products you need to satisfy customer demand, it’ll be hard to optimize your operating costs.
By overstocking, you’ll increase your inventory management costs –– everything from delivery through to storage.
How to improve SKU productivity
Improving your SKU productivity can help you optimize your inventory levels and better meet customer demand.
Here are some strategies for improving your SKU productivity:
Focus on top-quality product content
High-quality product content will help you sell more SKU units. Shifting more SKUs results in a healthier marketplace and better SKU productivity.
Focus on improving your product descriptions, images, and videos. Use appropriate product tags and headlines so shoppers can find your products more easily in search.
Apparel retailer Harry Rosen uses high-quality images and detailed descriptions in their product content:
Limit category spread
To start with, limit your category assortment to your core offering. Stick to those products that you know your customers are interested in buying from your ecommerce store. Then once you see generate sales with these initial SKUs, gradually expand your core assortment to include more long-tail products.
For example, let’s say you own a portable dog carrier brand. Customers arrive at your site hoping to buy a top-quality dog carrier bag for their four-legged friend. Staying close to your core offering would mean selling several varieties of dog carrier bags such as various sizes for different breeds. You could also sell replacement straps as part of your core assortment.
Retail brand Dog and Co are known for their city dog carrier bags. As part of their assortment, they also sell accessories like travel dog bowls and leads:
As you generate sales with these SKUs, you might then start selling adjacent products. These could be items like dog toys, treats, and leads.
To keep your SKU productivity rate healthy, limit your category spread to your core offering, then slowly move into adjacent products.
Highlight new products
To give your new products the best chance of success, highlight them to your most loyal recurring customers. You can do this by sending newsletters to your subscribers and recent customers that feature your new products.
Upsell your new product lines by including them in sections highlighting “recommended on your purchasing history”, or create a section similar to Amazon’s “customers also bought”.
Apparel retailer The Verticale displays products in a “you may also like” section:
Whenever you add new SKUs, it’s important to get them in front of as many relevant customers as possible. That way you’ll increase your chance of shifting more units.
Expand your product lines according to the season
Think about how seasons influence customer purchasing decisions too. Depending on your business you may experience spikes in customer demand for specific products throughout the year. When you’re ready to add more SKUs, think about what will resonate best with your customers at any given time of the year.
For example, if you’re expanding your garden furniture assortment in May, think about which products are most likely to have high customer demand. If you saw an increase in search on your site for hammocks and BBQs last year, then it makes sense to add these to your assortment first.
Then according to demand and sales, you can add more similar products to your assortment.
Properly forecasting seasonal customer demand will help you improve your SKU productivity and make better stocking decisions.
Optimize SKU productivity to improve your bottom line
SKU productivity isn’t a one-size-fits-all for retailers. The more you understand your thresholds and what success looks like for your business, the healthier your SKU productivity metrics and bottom line will be.
By identifying SKUs that shift well and finding what resonates with your customers, you’ll build a profitable marketplace that’s responsive to demand.
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