SKU Numbers Explained: How Retailers Can Use Them to Track Inventory and Sales
If you’ve ever visited a retail store and looked at a product’s price tag, you’ve likely come across a stock keeping unit, commonly referred to as a SKU number. A SKU number is an alphanumeric code that helps merchants track inventory and is usually placed on a product’s price tag.
For business owners with physical inventory, SKU numbers are critical for managing inventory and maximising sales. In this guide, we’re going to cover everything you need to know about SKU numbers: what they are, why they’re important, how to generate one plus additional advice and tips.
- What is a SKU number?
- How are SKU numbers used?
- How to create a SKU nomenclature
- SKU numbers vs. UPC codes
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What is a SKU number?
A SKU (stock keeping unit) is a unique alphanumeric code that merchants assign to products to make managing their inventory more efficient. Typically, SKU numbers are between eight and 12 characters long, and each character corresponds to a unique characteristic of the product it represents (like the item’s type, brand, style, or the department it belongs to).
SKUs are also completely unique from one business to another. They’re unique to your business and the information they contain should reflect what your customers or vendors ask most frequently about the merchandise you carry. Different businesses use SKU numbers to track different things, depending on what type of products they sell.
For example, a clothing store might create eight-digit SKU numbers where the first two digits represent the product’s category (t-shirt, sweater, etc), the next two represent the style (regular, oversized or slim fit), the following two represent its color (like BL for blue or BK for black) and the final two digits represent the stock count for that item.
How are SKU numbers used?
Retailers use SKU numbers to track their inventory and sales, but they can also lend to forecasting future sales and demand, and personalizing which products are recommended to customers in-store and online.
1. Accurately track inventory
Since SKUs are used to track a product’s characteristics, they can also be used to track inventory overall. For instance, a merchant can use SKU numbers to track a product’s availability and overall stock levels across multiple retail stores.
By having up-to-date inventory levels, merchants can order more of a product before running out of stock. In Lightspeed, merchants can take their inventory management one step further and set reorder points. When inventory levels of a product reach its reorder point (the minimum amount you want in stock at all times), that product, and the quantity you need to order, is automatically added to your Reorder List report and ready to be included in your next purchase order.
2. Forecast sales
By accurately tracking inventory levels, SKU numbers also help merchants forecast sales and anticipate what products they need to stock up on to fulfill the demand from customers.
Just don’t make the mistake of exclusively carrying top-selling items. Although it may move slower than other inventory, customers may still want those products and, if you stop selling them altogether, you may lose them as a customer.
An example of just that came in 2008 when Walmart launched Project Impact, where the retailer removed its lowest sellers, kept its highest sellers and stocked up on more expensive items with greater margins. Rather than boost profits, Project Impact resulted in declining sales because customers could no longer count on the retail behemoth to carry certain products.
3. Capitalize on high-profit products
A proper SKU nomenclature can help merchants understand what their business’s most popular (and least popular) items are.
4. Recommend relevant products
By tracking products using SKU numbers that represent a product’s characteristics (type, fit, color, etc), merchants are equipping their sales reps with an invaluable tool: information.
If the product a customer wants is out of stock, sales associates can explore alternative products with similar characteristics based on its SKU number—those are items the customer may also like.
This same tactic can be applied online as well. Just think of the last time you shopped online. When you looked at a product, did the page also feature “other products you may like”? This is likely because the featured products and the product you were looking at shared similar characteristics in the merchant’s SKU nomenclature.
5. Increase customer satisfaction
Since SKU numbers help merchants anticipate which products they need to reorder (and when to reorder them), they’re more likely to have the products a customer wants in stock.
By minimizing the amount of out-of-stock items, merchants can establish themselves as a reliable source that customers can count on to have the products they need.
Want to learn more about driving customer loyalty? Read our guide on how to launch a loyalty program to learn more about driving customer loyalty. In it, we cover the steps you can take to keep customers engaged and incentivized to shop with you online and in-store.
How to define and create a SKU nomenclature
Your SKU number nomenclature refers to the alphanumeric codes you use to define, categorize and identify the information that’s stored in each SKU.
For instance, assuring that each SKU reflects the product’s most important characteristics (color, manufacturer, gender, type, size and model for example). Usually, this information is ordered from most to least important.
So how do you go about creating your SKU nomenclature? Follow these guidelines:
1. Consider how much stock you carry
If you carry only a few items and don’t have plans on expanding your offering, you can opt to exclusively track bare-bones characteristics like gender. If you carry diverse inventory for multiple customer types, though, you’ll likely benefit from tracking additional details:
Product type > Gender > Size
How you purchase and manage inventory will likely benefit from tracking these details.
2. Assure that each SKU is unique
If SKUs are the same between products that share many similar characteristics, accurately tracking inventory becomes challenging. For SKU numbers to fulfill their purpose, each code for each product needs to be unique.
When establishing your SKU nomenclature, here are a few things to remember:
- Length must be between eight and 12 characters
- Avoid using the number zero
- Ensure that each letter and number you use has a meaning
Here’s a guideline for how that may look:
If the products you offer are more complex and you want each SKU to include more categories, you could consider adding any of the following to your SKU nomenclature:
- Store location
- Item type
4. Build your SKU nomenclature in your inventory system
Most retail point of sale systems have integrations available to help merchants create a SKU nomenclature and generate SKU numbers. In Lightspeed, for instance, merchants can use SkuVault.
Alternatively, merchants can use an Excel spreadsheet to define and document their SKU nomenclature, and manually add SKU numbers to products as needed. Be warned, however, this process is open to human error and can contribute to inaccurate inventory tracking.
SKU number vs. UPC code: What’s the difference?
While SKU numbers and UPC codes can both be found on a product’s price tag and certainly look similar, they’re not. Here’s a breakdown of how UPC codes and SKU numbers differ from one another:
SKU (stock keeping unit)
- Unique to each merchant
- Between eight and 12 characters
- Identifies product characteristics
- Retailer determines their own SKUs
- Accompanies a barcode
UPC (universal product code)
- Universal across all merchants
- Always 12 characters
- Identifies the manufacturer and item
- UPCs are issued by the Global Standards Organization (GSO)
If you’re a new business that needs barcodes for its merchandise, you should visit the GSO’s starter guide for creating barcodes and UPCs. Next, you can use our free barcode generator to create barcodes fast.
In a nutshell, SKU numbers and UPC codes should never be the same. SKU numbers should identify the product’s characteristics while the UPC code identifies the manufacturer, item and check digit. For more information on the UPC codes, read our article that outlines everything you need to know about UPC codes.
Over to you
SKU numbers are a great way of managing inventory in a systematic way. By associating each product with a unique number that reflects its characteristics, merchants can make smarter inventory purchasing decisions, keep inventory organized and make it easier for sales associates to find products that share similar traits.