A SKU (pronounced “skew”) stands for Stock Keeping Unit. A retailer typically uses SKUs to identify their business’s inventory.
Most retailers know that SKUs help track products from vendor to customer, but few know how they work behind the scenes and why they’re so important.
Whether you’re a retail veteran or brand new business owner, have a massive inventory or limited stock, or operate a brick-and-mortar store or online marketplace, you likely have a SKU architecture in place — or you’re looking to add one.
Keep reading to learn:
What is a SKU number?
SKU stands for "stock keeping unit" and is a number that retailers use to differentiate products and track inventory levels. An SKU is typically eight alphanumeric digits long. Products are assigned different SKU numbers based on various characteristics, such as price, manufacturer, color, style, type, and size.
SKUs aren’t universal; they’re meant to be unique to your business and can be tailored to fit your needs or those of your vendors and customers.
Why are SKUs important?
SKU numbers are important because they help you accurately track your inventory to prevent having phantom inventory and to pinpoint when to order new products so your merchandise never goes out of stock.
Can two products have the same SKU number?
No. SKU numbers are unique to the retailer selling the products. However, two products could have the same barcode or UPC number. (Keep reading for more information about SKUs vs UPCs vs barcodes.)
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How to create SKU numbers
SKUs provide data about sales and inventory movements that are beneficial for your relationships with vendors and customers.
Before you can access that data, however, you must create your products’ SKU numbers — also known as your SKU architecture.
Online SKU generators such as Primaseller or TradeGecko can help with the process, too. You can also create SKUs by hand and on an as-needed basis, although this isn’t always recommended, especially for retailers with large inventories.
Now, let’s dig into the anatomy of a SKU number.
The first part of a SKU is typically the broadest characteristic, such as the department, product category, or supplier. The top two or three alphanumeric characteristics are mapped to this.
The next few characters represent features specific to each product — its color, size, brand, or other subcategory.
Finally, the last two to three characteristics act as a sequence identifier, allowing your SKUs to tell you the number of products you have and the order in which they were purchased and processed.
SKU number examples
Let’s unpack an example of how one retailer — say, a wine shop — may generate its SKU numbers.
|Central Winery||CW||Pinot Grigio||22||001||CW22001|
|Eastern Vines||EV||Sauvignon Blanc||23||001||EV23001|
Tips for your SKU naming convention
- Stay between 8 and 12 characters
- Begin the SKU with a letter, such as the first letter of the supplier or brand
- Never use zero or special characters like !, @, or &
- Create a unique, easy-to-understand format
- Lead with the most shopped-for product characteristics to benefit your retail sales team
SKU vs. UPC
While SKUs and UPCs look similar — both are seemingly identical alphanumeric codes — they are used in two different ways. Here’s a helpful breakdown.
|SKU (Stock Keeping Unit)||UPC (Universal Product Code)|
|Between eight and 12 characters||Always 12 characters|
|Identifies product traits||Identifies manufacturer and item|
|Retailers determine SKU architecture||Issued by the Global Standards Organization|
If you’re a new business that still needs barcodes for your merchandise, visit GS1’s starter guide to creating barcodes and UPCs.
As you create your SKUs, ensure those and your UPCs are not the same.
As a rule of thumb, let your SKUs identify product traits, while the UPCs identify the manufacturer (first six numbers), item (next five characters), and check digit (last number). (The check digit is formulated by adding and/or multiplying multiple digits in the code to show that the UPC code is valid.)
SKU vs. barcode
A barcode is the batch of black lines that retailers scan when completing a customer’s purchase. The term barcode is often used in place of UPC, meaning that the two are interchangeable.
Unlike SKU numbers, which are unique to a business or seller, barcodes are assigned to all like products regardless of where they are sold. SKUs also accompany barcodes.
🤓 What does one barcode say when he bumps into another? SKU me.
How to use SKUs to grow your retail business
- Track inventory accurately
- Forecast sales
- Amplify your biggest profit generators
- Boost customer loyalty and satisfaction
- Offer customers new suggestions—and increase sales
1. Track inventory accurately
SKUs distinguish product traits, so they are helpful tools in tracking the health of your overall inventory—namely, availability.
By using your SKU data to keep an eye on product statuses, you can pinpoint when exactly to order new products. This is referred to as a retailer’s reorder point.
💡 PRO TIP: To prevent stockouts, set reorder points in Shopify admin to get low stock notifications. These ensure you have enough lead time to replenish a product’s inventory before quantities reach zero.
With accuracy comes efficiency and productivity. When you can inventory manage in real time, you better understand the evolving needs of your business.
2. Forecast demand and sales
Accurate inventory numbers also mean better and more accurate sales and demand forecasting.
As a result, it’s easier for you to answer questions like:
- How much staff do I need on the shop floor during a specific season?
- How much inventory of each product should I have?
- How often should I restock specific products?
- How much payroll can my cash flow cover in different seasons?
Keeping a pulse on these moving parts of your retail store helps establish you as a reliable merchant to your customers and vendors.
If your SKU data highlights low-selling stock, don’t immediately eliminate those products. Some customers may still purchase those products, so decrease your inventory instead.
A 2008 Walmart initiative called Project Impact is a prime example of what not to do: the company kept its highest selling products, removed the lowest sellers, and added in pricier items. The result? A quick decline in sales because customers looked to other retailers.
However, there is a solution that involves your SKU architecture. According to the Harvard Business Review, consider how customers are purchasing your products. “Most of the time customers don’t buy products; they buy a bundle of attributes,” authors Marshall Fisher and Ramnath Vaidyanathan write. “Think about the last time you bought a TV. Did you say, ‘I want TV X’? Or did you think about screen size, resolution, price, LCD versus plasma, and brand?”
By structuring your SKU numbers to communicate the attributes customers want to know about your products, you can strategically analyze your inventory to forecast demand and satisfy customers.
3. Amplify your biggest profit generators
Your SKU architecture highlights your most sought-after items — the least desired ones, too. Aside from knowing your reorder points and what products to axe, your SKUs can also help you get creative with your highest-selling items.
Data surrounding your biggest profit generators can inspire in-store product displays and visual merchandising decisions as well as strategic marketing campaigns that help turn over that popular stock even quicker.
4. Boost customer loyalty and satisfaction
Since SKU numbers can be used to anticipate reorder points, they can also help your customer always find the product they need. This leads to a shopping experience with little to no stockout issues — resulting in increased brand loyalty and satisfaction among shoppers.
Additionally, when a product does go out of stock (which is inevitable in the retail world), your customers might be more willing to be patient rather than taking their business elsewhere.
💡 FURTHER READING: Learn how you can cultivate more customer loyalty with a loyalty program.
5. Offer customers new suggestions—and increase sales
SKU product data isn’t valuable just for inventory management and sales analysis. It can also be applied on the sales floor. For example, if a product is out of stock, your retail team can use their SKU knowledge to direct your customers to similar products. Alternatively, if a product is in stock for your customer, your associates can suggest related products to complement their purchase.
This is often utilized on ecommerce websites, too. When you browse products online, retailers often display similar items you may like. This is likely done through a retailer’s SKU architecture, where they’ve applied an algorithm to provide suggestions with similar characteristics or features.
Getting started with SKU numbers
SKUs aren’t a one-size-fits-all for retailers, and the more you tailor your SKU architecture to your and your customers’ specific needs, the more you’ll help your business succeed.
By understanding what’s important for you, your vendors, and your customers, you can craft a SKU architecture that allows you to efficiently manage your inventory and easily scale your retail business.
This post was originally written by Jen Hasty and has been updated for freshness and accuracy by the Shopify team.
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