When keeping track of inventory for a product, it's up to the merchant to decide how many SKUs to publish and how many of each to have available. For example, a clothing brand that sells a certain style of t-shirt might decide to stock seven of the ten colors the supplier offers.
So, what does the store owner do when he or she finds out that more than half of those colors aren't selling as well as they should?
The obvious thing to do would be to eliminate all SKUs that aren't selling well. But they also have to figure out if the remaining SKUs are worth the cost of keeping that product in stock or if the product should be taken off the shelves completely.
This is where SKU rationalization comes into play.
You might think it’s good to give customers a lot of options. But too many SKUs can make it hard to run a Shopify store. Too many products will lead to too many suppliers, lots of data to collect and analyze, and too much storage space needed.
Why SKU rationalization is vital to success
For brands looking to get the best performance from their SKUs, sometimes you need to remove underperforming SKUs from your product catalog. It’s a tough but necessary decision to ensure your brand stays profitable.
Some of the benefits of SKU rationalization include:
- Better inventory accuracy
- Reducing storage and supplier costs
- More streamlined processes for picking, packing, and shipping
- More accurate triggers for SKU replenishment
- Easier inventory tracking
- Less dead stock
Inventory costs go down
Carrying costs are made up of storage fees, insurance costs, and labor costs. Together, they make up 30%-40%% of your inventory costs. Once you buy inventory, you have to pay to have it stored until it’s ready for fulfillment.
By looking at how each SKU has sold in the past, you can decide how much to reorder and when. An automated system for keeping track of inventory can give you the data and analysis you need to figure out the inventory turnover rate. This shows how many times inventory is sold and then replaced in a certain amount of time.
With this information, you won't have to worry about buying too much of a slow-moving or soon-to-be-outdated product or paying too much for it.
Make it easier to manage inventory
Inventory management is more than just keeping track of what's on hand. It also involves making decisions about each SKU, such as when and how to reorder (if at all).
Inventory management software can help you make better decisions by keeping track of how SKUs perform over time and giving you key inventory analytics, such as inventory turnover rate, SKU velocity, demand forecasting, and more.
With this level of inventory visibility, you can track inventory in real time in a way that takes less time and automatically collect data to help you make good decisions.
On the balance sheet of a business, inventory is listed as an asset. With the assumption that a profit will be made at the end of a fiscal year or accounting period, any costs that come with holding on to inventory that hasn't been sold are called "working capital."
But any business owner should know that sales can go down or the value of inventory can go down.
In this case, items that haven't sold can be written off as inventory. This might be good for your business in the short term, but tying up too much capital in items that can't be sold can be bad in the long term.
How to measure SKU performance
The number of SKUs within a certain range is divided by the total number of SKUs. Then, increase this number by 100%. With this formula, you can find the SKU ratio, one of the most important measures of how well an SKU is doing.
Best practices for SKU rationalization
Before looking at any data, you should consider who your products are aimed at and what makes it special. As a store owner, all of the products you sell should be in line with this central value proposition. This helps you make a set of products that go well together and speak to your customers.
Consider questions such as:
- Who am I trying to reach?
- What do they want that fits their lifestyle?
- What styles do they like the most?
If your products match these answers, this could help explain why some SKUs aren't selling as well as others. Putting together a good list of possible products will help you figure out which ones should be put on the list to be taken out of your inventory.
Do a thorough SKU analysis
If you keep an eye on your sales data on a regular basis, you probably already have a good idea of which SKUs do well and give you a good return after you take into account the costs of inventory and suppliers. But it's still important for all of your SKUs to be ready for the following:
- High demand
- Changes in what people want
- High rates of return
- Low number of items sold
By looking at all these factors, you can figure out all of the ways that an SKU could be hurting your business. If two or more of the above factors are true about a particular SKU, you might want to remove it from your inventory. If an SKU has one of these problems, you should look into how you might be able to fix it for better inventory management.
Think about other things that could change the results
After you've done your analysis, it's important to think about things that could change how profitable your SKU is. For example, comparing your results to what you did for marketing during the same time period will show if any of your promotions caused sales of certain SKUs to rise artificially.
On the other hand, if you just released a new product that is similar to an old one, sales of the old product could go down. It's called "product cannibalism" (another reason why businesses need to be careful when proliferating SKUs). It's also a good idea to look at what your competitors are doing to see if any new products could be taking customers away from yours.
Get your product catalog in order
As you start to sort, it's a good idea to put your SKUs into different groups so you can look at them as you go. For example, you can set up columns for "keep," "remove," and "review" for the SKUs you're not sure about. This will help your audit make more sense and keep you from making mistakes.
Look at how it turned out
Now that your new catalog is done, you need to measure the results of the rationalization to see if your operational costs have gone down or if you have less dead stock. If this happens and doesn't hurt your sales, it's a good sign that you've done a good job of optimizing your inventory. Every six months is a good time to do an audit. This will keep your house in good shape and give you enough time to collect data that will give you valuable insights.
How Cross-Store Selling makes SKU rationalization easy
Want to know the secret to make SKU management easy? It’s Cross-Store Selling. With Cross-Store Selling, your brand can sell products from other stores and vice versa.
Add and remove SKUs on a whim
With Carro, we have a directory of the biggest brands for you to partner with. But if you can’t decide which brands are the best fit, we have a tailored recommendation service where we introduce you to brands so you can begin working together.
The best part is you don’t have to pay for products like you would with traditional wholesaling. This gives you the freedom to choose different SKUs to see what complements your existing product catalog.
"Take my word for it, if you install Carro, you are going to see what I’ve seen. Which is a dramatic increase to average order value, especially on orders that contain Carro products, which for us is over 80% increase to AOV."
Ryan Pamplin, Founder & CEO of Blendjet
Virtual inventory makes fulfillment easy
Brand partnerships are not like wholesaling. With Carro, you don’t have to buy products from your partners. Instead, orders are automatically sent to your partner brands so they can handle fulfillment themselves.
“Before we joined Carro, we had put our company on the market. We thought we needed capital to expand our traditional wholesaling. Now, we’re able to meet our goals without having any cash come out of pocket. We’re tripling and quadrupling the numbers of units that we move because we have access to so much more inventory.”
Amy Richardson-Golia, June & January
Find new bundling & upsell opportunities to increase AOV
Perhaps the most exciting reason to leverage Cross-Store Selling is that it’s the best way to grow your Shopify store in the long run. By working collaboratively with other brands, your brand will set itself up for success. Your Shopify store will become THE destination for your niche.
One of the best reasons to shop on Amazon is convenience. Being able to buy everything you need in one place is a powerful motivator. Wouldn’t you love it if your Shopify store was the go-to place for your customers’ needs?
"In addition to a nice contribution to the bottom line, it was also one of the most highly-engaged social posts for the year."
David Krimper, Director of Ecommerce, Manduka
To learn more about how Carro can help your Shopify store grow, check us out on the Shopify App Store.