What is a SKU Number of a Product

When running an online business, it’s important to keep track of every detail of transactions as it might be challenging to properly keep a check on the amount of stock you have left.

This is where SKUs come in. They help to fast track the amount of inventory leaving and entering your business. You will have comprehensive information about orders, shipments, and inventory. This way, you eliminate sitting inventory and have a stable inventory management system.  

A SKU number is seen on the back of products and they are usually alphanumeric. You won’t need to go through the tedious process of tracking your inventory when you have a SKU setup. 

This article explains in detail what SKUs are, how to set up SKU architecture, and the benefits of using SKUs.

1. WHAT IS A SKU?
2. HOW ARE SKUS USED?
3. WHAT'S THE DIFFERENCE BETWEEN SKU AND UPC CODES?
4. HOW TO USE SKUS TO BOOST YOUR BUSINESS
5. SKU MANAGEMENT
6. TIPS FOR CREATING A SKU NUMBER SYSTEM
7. STREAMLINE YOUR INVENTORY MANAGEMENT WITH VIRTO COMMERCE
8. FAQ

SKU is an acronym for Stock Keeping Unit and it is simply a distinctive code given internally to each product by retailers. SKUs are alphanumeric, usually consisting of eight to twelve numbers and they are used to keep track of the level of inventory of a business. 

SKUs are peculiar to each product as they help show the important information of a product such as the department, style, type, price, size, color, gender, and others. These details are usually arranged in order of priority and significance. 

However, a SKU is not universal as it is generated by individual retailers for their brand. There is no definite SKU architecture, so each brand has to come up with their own unique way of generating SKUs. 

Most business owners use SKUs to track their inventory and sales. A retailer has to identify the factors that will help to develop and improve their business’s sales. Once those factors are known, they can proceed to create a SKU architecture for their products. 

Creating a SKU architecture is not generic as businesses vary and factors that may improve the sales of each business differ. So, once a retailer identifies the key factors to consider, these factors are used to create a SKU and are given priorities depending on the business needs.

There are usually two similar lines of numbers at the back of a product, and although they look so identical they are very much different. These two numbers are the SKU and UPC codes of the product and they serve separate purposes. 

SKU stands for the Stock keeping Unit which denotes the identity of the product internally. This refers to the unique identification code a retailer gives a product in order to differentiate it from other ones.

UPC on the other hand stands for the Universal Product Code of a product. It’s a universal code in the sense that it is used externally and globally. The UPC code of a product is the same no matter where it is shipped from or sold to. It’s a code developed by the manufacturers of the product together with the Global Standard Organization (GS-1). 

Another typical difference between the pair of codes is their sequence. SKUs are alphanumeric and they vary in length. They often range between 8 to 12 characters and include both letters and numbers. UPC is a sequence of numbers only and contains 12 characters.

SKUs are important for maintaining the inventory system of any business. Since they are unique and contain the relevant details of a retailer's product, retailers can easily track their inventory to see how it’s doing and this helps them improve their inventory management system. 

Here are ways you can boost your business using SKUs.

Tracking your inventory is very important as this helps you analyse the performance of your product’s orders and sales. SKUs can be used to effectively and accurately track your inventory. Since a SKU tracks a product’s trait, a retailer gets enough information about his transit-inventory and makes a decision based on the information obtained. The information helps the retailer make a swift decision on what to do with the on-hand inventory, whether to proceed with the sales or make modifications to improve sales. 

SKUs are also influential in forecasting your sales, as you can decide which products to stop selling and the ones to keep in stock. Based on your SKU architecture, you get to analyse your sales and this gives a clear view of what your customers want. You can determine the products customers are constantly demanding and you ensure to keep those in stock. Once your customers see that you’re reliable your sales will skyrocket.

When you properly structure your SKU architecture, your product traits enable you to understand your customers much better. You get to see the most demanded products and the less demanded ones. The more demanded products are your biggest profit generators so you must ensure to keep your inventory in stock. 

Customers will keep on turning to your store when they know you always provide what they require. Doing this will take your sales to the next level.

SKUs allow you to keep track of your product’s performance metrics. It helps you track the number of orders made, number of sales, and the amount of stock remaining. 

You get an overview of your entire business and this makes your decision making much easier. You decide on the inventory to always keep in stock and your customers will keep on coming and be satisfied. 

So, if you eventually run out of stocks, they will be willing to wait till you are back in stock. They will remain loyal to you rather than buying from other vendors.

You can use SKUs in so many ways and one of such ways is to properly analyse your products. Your SKU architecture gives you a comprehensive detail of what products your customers demand. 

Now, if you run out of stock you can suggest similar products to your customers. This is very effective and helps you keep your customers till you get back in stock. This at times makes customers order more products as they might be encouraged to buy more of your suggested products together with their desired product.

When using SKUs, it’s pertinent to manage them properly as they can go a long way in improving your business. SKU management helps businesses determine their on-hand inventory and holding costs. This helps them ensure their financial objectives are met. 

With proper SKU management, retailers can optimize their inventory levels and generate more sales. They can efficiently lower their inventory holding-costs and generate more capital. 

SKU management can be done in two ways. 

If you decide to use the manual SKU management approach, there are two metrics needed to be calculated and compared. These are the SKU ratio and Sales ratio.

You need to make a list of all your SKUs by checking your products catalog, then you place the list in a spreadsheet. Then you check the selling price and cost price for each SKU, and calculate your gross profit. You get that by subtracting each cost from the selling price. 

Next up is creating the gross profit ranges. In your spreadsheet, you need to create a price range for your gross profits. Say, less than $10, $10 - $19.99, and so on, then you keep note of the number of SKUs in each range. 

Lastly, you calculate the SKU ratio for each range. This is done by dividing the number of SKUs in each range by the total number of SKUs in that range and you multiply the result by 100.

To calculate the sales ratio you still make use of the gross profit ranges. This time however, you need the number of units sold for each range. You divide the number of units sold in each range by the total units sold for that range, and multiply the result by 100.

Once you’ve calculated the SKU ratio and Sales ratio for each gross profit range, the next thing to do is to compare the two values. You can decide to use a spreadsheet or a graph for the comparison. 

You need to group your findings into two categories; the best performers category and the worst performers category. 

The best performing products are the products whose Sales ratio is greater than the SKU ratio, this means they are more demanded by customers and they generate more sales. You should keep more of such products in stock.

The worst performing products are the ones with a lesser Sales ratio to SKU ratio. This means you have a high inventory of the products and make little sales. It’s best to reduce the inventory or stop selling the products.

If you are the busy type and can’t go through the manual process of computing the SKU ratios and Sales ratios of your gross profits, you might consider using an automated approach for your SKU management. 

An automated approach involves making use of softwares for your inventory management. It entails integrating your inventory management with tools like Bar Coding and POS (Point of Sale) systems. This tracks your inventory electronically and automatically helps you update your inventory. It helps improve your marketing process and yields more sales.

Now that you have a comprehensive knowledge on why SKUs are important and how to use them, it’s time to know how to set them up. SKU architecture is simple to create as all you have to do is mix a sequence of letters and numbers together. 

Here are some tips you can follow.

Creating SKU numbers for your business is a very simple thing to do however you must endeavor to avoid putting too much information or making it too lengthy. It’s okay to choose about two or three product traits to include in your SKU number system. This makes your SKU unique and easy to track.

Knowing the size of your stock and the amount demanded by your customers is vital in creating your SKU architecture. If you have a minimal stock you might include only a SKU architecture that tracks customer type (such as category for adults, kids, or toddlers). But, if you have a larger stock you can include more product traits in your architecture such as the gender and size.

Doing this is also crucial as it helps you satisfy your customers much better. You need to find out what product trait your customers request the most. When you know the trait you’ll include a number that represents that trait at the beginning of your SKU. This will help you ensure utmost customer satisfaction.

Find out all the relevant details about your product and include the details in your SKU. You have to give the most significant details a higher priority in your SKU sequence while the other details should be included at the end of the sequence.

SKUs should contain only alphanumeric characters. Only letters and numbers should be included in your SKU architecture, do not include any special character like “/” or “@” as they might cause confusion and prevent you from accurately tracking your inventory. Also, spaces between your characters should be avoided. Lastly, avoid using letters “O” and “I” as people often confuse them for number 0 and 1 respectively.

Ensure the first three characters of your SKU architecture represents a top-level identifier (such as the department, category of store, or supplier). You can easily identify the store location of any of your products by taking a look at the SKU number.

Your unique product identifiers should be represented by the middle characters of your SKU architecture. Whatever features make your products unique and sell better, they must be placed at the middle of your SKU. Some of such identifiers are sub category, size, item type, color, and so on.

Rounding off your SKU architecture with a sequential number gives you an overview of the number of inventory in your product line. It allows you to separate older items from the newer ones and also makes your setup very easy. You can use sequential numbering such as 010, 011, 012, 013, and so on for the final series of your numbering.

You can create your SKU architecture manually but it’s much easier leveraging an Inventory Management System or POS. Any of these help set up your SKU quickly and efficiently track your inventory. These software systems help you manage your inventory and sales easily and they keep you updated about your on-hand inventory and the number of items sold.

It’s become a thing of the past managing your company’s inventory manually as it is very complicated and time consuming unless you have a small company and operate in a single location. Most companies now leverage inventory management software as they help to efficiently and effectively manage inventory. 

So, if you are looking for a way to streamline your inventory management system you can do that efficiently with the Virto Commerce inventory module. With Virto’s ecommerce platform, supported third party integrations, and dedicated inventory module, you get to save yourself the trouble of tracking your products manually and ensure your customers see the remaining stock in real time. This will help you boost your sales and increase the profitability of your business.