What’s a SKU number and why do retailers need it?
Companies at the bleeding edge of inventory management use SKUs to store a myriad of attributes and use proprietary algorithms to enhance the customer experience.
Fashion pioneer Stitchfix for example, stores basic data on each SKU, like size and item measurements. They also document contextual item descriptions and client feedback within each SKU. Because of this, their algorithm generates near-perfect customer recommendations based on this data.
According to its 2020 Annual Report, Stitchfix’s “algorithms filter over one thousand SKUs to recommend a subset of relevant merchandise to our stylists, who leverage the information to select the merchandise for a client’s Fix.”
This article covers everything you need to know about SKUs, creating your own system, and how to leverage them to track and manage your inventory. We tackle:
- What a SKU number is
- How to generate SKUs for your business
- The difference between SKUs and UPC codes
- How retail businesses leverage SKUs to optimize their inventory, pricing, and merchandising
What is a SKU number?
SKU stands for "shelf keeping unit" or "stock keeping unit" and it refers to the unique identifier a company uses to keep track of every product variant in its inventory. It is an alphanumeric code and is customized specifically for the business.
SKUs are mainly used to determine pricing strategies and inventory levels. If you sell polo shirts, for instance, each color and size combination will have its own SKU so you can track pricing and inventory for every variant.
For example, Clothing brand Mizzen+Main has a product called the Leeward Short Sleeve shirt. Each shirt varies based on…
- Size (small, medium, large, X-large, XX-large)
- Fit (trim or classic)
- Length (regular)
- Design (8 different designs)
In total, Mizzen would have 80 different SKUs for the Leeward Short Sleeve shirt.
That’s only for one product for a single brand.
A retail marketplaces like The Helm can have between 5,000 - 10,000 active SKUs, especially if they work with third party brands. On the other hand, tech analyst Ben Thompson notes that grocery stores businesses thrive on assortment and as a result, typically have “between 30,000 to 50,000 different SKUs”.
How do you generate SKUs?
Generating SKUs can be daunting if you’re just starting out. Many new retailers use this shortcut:
Going back to our Mizzen+Main example, by following the “product-size-fit-length-design” pattern, Mizzen can create SKUs that look like this:
In reality, Mizzen uses more abbreviated SKUs. For example, the SKU for the Navy Leaf Dot Print version is 1WS-022.
The SKU for the Red Navy Dot version is 1WS-0121.
Depending on the product, SKUs can also be more descriptive. The SKU for Mizzen’s Navy/Tan belt, for example, is BLT-S20-41022.
Compare this to the SKU for its White Solid Pocket Square, which is PS-1014
SKU codes vs UPC codes: What’s the difference?
UPC stands for universal product code and is a global product identifier, most commonly used in North America. Barcodes are the printed, machine-scannable images of UPCs. These were first implemented in the consumer packaged goods industry as a way to speed up checkouts.
Convictional’s work with wholesalers and retailers led us to build a platform that accommodates a diverse range of SKU configurations and barcodes and uses both to validate product data and ensure high quality.
While a SKU is used for a business’ internal purposes, the UPC code for a product stays the same, regardless of the retailer.
SKUs can contain both letters and numbers, while UPC codes are commonly made of 8-12 numbers.
SKUs are also generated internally based on what makes sense for the business. UPC codes on the other hand, are created by manufacturers, working alongside the Global Standard Organization (GS-1).
Finally, while SKUs are recommended but not a requirement for legal business operations, marketplaces like Amazon, Rakuten, and Alibaba require UPCs are required in order to list and sell products.
How do SKUs help ecommerce inventory management?
Accurate SKUs fuel rapid decision-making
Classic retailers use data from SKUs to test new merchandising and store formats. McKinsey found that identifying fast moving SKUs and giving them extra shelf space, results in efficient stocking and lower store labor costs.
In 2020, Best Buy used a limited SKU assortment to reduce shelf space only to the most popular products, and make room for in-store pickup.
When the classic retailer, Lindt Canada, needed to rapidly test a buy-online, curbside pickup program during the 2020 lockdown measures in time for Easter, they limited their inventory to 40 SKUs and arranged pickup at 16 stores.
But this use of SKUs extends beyond classic retailers and in-store merchandising.
Digitally native, modern brands use the breadth of their SKU count as a measure of their product page complexity. For example, menswear retailer Tact & Stone uses a custom SKU setup to build their product pages.
This helps them determine how well a new ecommerce platform or software provider can handle its operations.
SKUs signal business trends, resonance, growth, or stagnation
SKU counts can be used as an indicator of an overarching trend. Ecommerce returns software Narvar, for example, calculated how much customers were bracketing — the practice of ordering multiple variations of a single SKU to try at home — based on variations of the same SKU in a single order.
SKU productivity can also indicate a marketplace’s growth trajectory and potential for category expansion. When Walmart was aggressively pursuing their ecommerce marketplace strategy, they used new SKUs and new sellers as leading indicators for success.
SKUs factor into a balanced ecommerce scorecard
In its 2021 The State of Fashion report, McKinsey noted that 61% of executives are looking to reduce the number of SKUs they have. They also reported that retail darling Nike has “streamlined [its] product lines in order to improve SKU productivity by 15%.”
While a high turnover count indicates positive business growth, a significant number of unproductive SKUs might mean that you need to streamline your assortment, shorten your product cycles, or innovate faster.
In its Future of Retail Operations report, McKinsey also recommended using SKUs to map out and drill down to the underlying cost of creating the product. Based on this analysis, you can then iterate on each step of your product cycle and optimize the cost.