The Stock-Keeping-Unit, or SKU, is an identifying label assigned to each product your e-commerce business acquires and sells. As such, a SKU plays several crucial roles in online retail. Materials from other businesses come with their own existing SKUs, but you are free to (and should) create your own unique SKUs for the products you sell.
SKUs are used to:
- Identify particular products in your own inventory and stock.
- Give third-party marketplaces and logistics providers a way to correctly identify your products.
- Link your merchandise to both its internal and external catalog listings.
- Help your fulfillment team pick, pack, and ship the correct merchandise to the correct customers.
As valuable as SKUs are for organizing and processing orders, they are also vital to measuring both the growth and evolution of your e-commerce brand. Much of the ebb and flow of your omnichannel e-commerce business can be tracked alongside the life-cycles of your SKUs.
Every SKU follows a predictable pattern from creation to an eventual end of life. Knowing where a product is in this timeline can help you make the decisions to optimize everything from production to marketing. Conversely, neglecting the telltale signs of a SKU transitioning through its life cycle could negatively impact your bottom line.
Technically, a SKU can be any unique combination of letters and numbers you choose. That said, a more purposeful SKU design could be used to help keep your business and inventory more organized.
Some considerations when deciding on a SKU format include:
- Length – As a rule, SKUs should never be longer than 16 characters. In most cases, 8-10 characters will work just fine.
- Purposeful Characters – Rather than choosing random characters (SKUs typically include digits 0-9 and letters A-Z), consider being more deliberate in your SKU creation. Some SKUs may contain specific abbreviations that are relevant to your products. For example, S, M, and L could be used to indicate size variations for a particular product. ‘V1’ and ‘V2’ could be used to distinguish between different versions. In some special cases, codes can even be created to link products to identifiers like lot number or manufacturing date.
- Readability – If a SKU is misread, it can cause costly errors like misplaced inventory or fulfillment mistakes. Considerations like the use of hyphens or underscores to break up longer strings of characters or deliberate avoidance of easily-confused character pairs like ‘1’ and ‘l’ or ‘0’ and ‘O’ can make your SKUs more readable and help avoid confusion.
In some cases, the SKUs you create may not be an exact match for the SKUs assigned by third-party partners. Some marketplaces and fulfillment companies may assign their own unique identifiers for your products to conform with their own internal record keeping and/or to avoid confusion with products from other brands. In some cases, it may be ideal to accept a merchant SKU as your own to avoid confusion and redundancy.
There are also specialty SKUs that you may create within your own brand. For example, Sellercloud allows you to create Shadow SKUs – secondary product SKUs assigned to products from the same inventory that allow you to do things like A/B test catalog listings, sell products across multiple categories, and sell the same product with unique names and images.
Bundled and kitted merchandise can be assigned unique SKUs as well. This allows you to list multiple products as a singular catalog item, while allowing your fulfillment team to pick, pack, and ship the combination from your inventory – either piecemeal or as a prepackaged set.
Tracking SKU Growth
Once a product has been assigned a SKU, you have the ability to track a number of different characteristics about a product. Some elements are functional – like generating individual order summaries and invoices to share with customers or the picking and packing status of orders being fulfilled by your warehouse team. Others are big-picture metrics that allow you to assess how products are performing across your brand and the places where you sell them. The latter must be a cornerstone of your ability to make data-driven decisions about the short- and long-term value of your SKUs.
Ideally, you want every SKU to sell well and generate substantial profits for your e-commerce business. In reality, every SKU cannot be your top-performer. If you are like most brands, you are likely to have anywhere from 10-30% of your SKUs generating 70-90% of your profits. The remainder are typically less popular, more niche, or seasonal products.
When a new SKU is added into your brand’s offerings, you may not know immediately whether it will be a hit with customers or not. As such, you need to be tracking how your SKU is performing. Some particular SKU-based metrics to watch include:
- Profit & Loss (P&L)
- Inventory Turnover Rate (ITR)
- Channel-based performance
- YOY seasonal performance
An omnichannel e-commerce management platform like Sellercloud and our WMS platform Skustack give you the power to monitor and track these figures over the life cycle of your SKUs. Even if a new SKU doesn’t achieve brand-defining success, it can still be a viable offering to keep in stock and listed on the channels where you sell.
Ultimately, when you are monitoring SKU growth, you are looking for improvement and profitability over time. As this continues to trend upwards, you can be confident that your SKU is still in the emerging stages of its life cycle and will continue to remain viable in the short term.
SKU Maturity and Decline
As the curves of the aforementioned metrics begin to flatten, it may be a sign that a SKU has entered its next stage. This is sometimes referred to as “product maturity.” At this point, your production and sales volume should be at their absolute peak for the given SKU.
You may be able to prolong this period by reducing production costs (something that the inventory turnover rate may justify) and/or taking the opportunity to branch out into new secondary markets. Inevitably, however, once a product reaches maturity, it is unlikely to undergo a resurgence.
As sales and profits for a SKU decline, compared to your historical SKU data and your other products, it becomes time to give serious consideration to said SKU’s remaining value to your business and brand. In some cases, it may not have the relevance or profitability to remain in your catalog.
This type of decline could be caused by a number of factors, including:
- The SKU faces increased competition in the marketplace.
- You have exhausted new venues to market and sell the product.
- The SKU is becoming obsolete due to advances in technology.
- The SKU’s sales are being cannibalized by a new version or iteration of the product.
- The SKU faces a general decline in public interest.
A decline caused by any of these factors may not justify abandoning a SKU, but it should raise a flag that the moment for that difficult decision is likely on the horizon. Yet, during the decline phase, there is still money to be made. The fact that production has likely already optimized and at its most efficient price could allow additional profits to be eked out – even as marketplace interest starts to dry up.
When to Phase Out a SKU
No matter the cause, when maintaining a SKU – with all the inventory space, marketing, and general attention that it requires – outpaces the product’s value to your bottom line, it is usually time to move toward the final stage of the SKU’s life cycle.
This involves a series of moves that commonly include:
- Removing dead stock from your warehouse through sale or destruction
- Delisting the SKU from your website and marketplace channels
- Issuing orders to retrieve or destroy excess inventory held by third-party partners
- Reallocating production to more viable SKUs or terminating relevant production agreements
- Reallocating marketing efforts toward new or existing SKUs
Failure to recognize this inflection point can prove costly for a number of reasons. Continuing to dedicate warehouse space and carrying costs to SKUs that are not generating a return on their investment is foolhardy. The resulting dead stock and catalog bloat can detract from the value of the rest of your products and reduce your overall efficiency to market and fulfill orders for your profitable SKUs.
The Sellercloud family of products are perfectly suited to supporting your brand’s SKUs throughout their entire life cycle. Our over 120 integrations with industry-leading, omnichannel e-commerce partners can put you in the position to maximize the value of your products and extend their profitability as far as possible. What’s more, our cloud-based platform makes creating and tracking your SKUs simple and intuitive. That means you can easily access the information you need to make the data-based decisions to get the most out of every SKU you create.
Contact us directly for a free demo and see for yourself how Sellercloud is the partner you need to take your e-commerce business to the next level.