[Guide] The Importance of SKUs For Your Online Retail Shop

By Nizaruddin Ahmad E-commerce No Comments on [Guide] The Importance of SKUs For Your Online Retail Shop

Whether it’s online or offline, companies and retailers often find it difficult to keep track of all of their products and goods inventories.

That is, if they don’t have a system in place.

It is normal that inventory inspections are done at the end every month by retailers to keep track of remaining stock as well as plan on future stock for the following month.

And with the right coding system (no not computer coding), these inventories can be managed and organized systematically. In most cases, you’re using an SKU.

What Is An SKU?

SKU (pronounced as “skew”) known as Stock Keeping Unit is a bar code that is made of letters and numbers that represent your products’ details.

Usually, you would assign unique and specific SKU codes for different types of products and services that you offer.

This helps you and other retailers to track products by assigning a stock keeping unit number to plan their next order and target.

By using SKUs, you can even keep track of your products with different characteristics, like:

  • Price
  • Color Stye
  • Brand
  • Gender
  • Type
  • Size

You can even choose how you want to arrange these characteristics from the most important to the least.

SKU codes are often seen printed in warehouses and retail stores’ products and services, catalogs, product fulfilment centres and etailers’ goods sold online.

You should know that SKUs must be customized to represent your business’s products and services only. This is what would differentiate your brand from others.

Are SKUs and Products Different or The Same?

Technically, SKUs are the barcodes for your products to help you manage them, so they are different.

But!

“SKUs” and “products” are often used interchangeably for each other. For example, if we Googled “How many SKUs does Amazon have?”, we would see the answer as “the number of products Amazon has”.

How Many SKUs does Amazon have (Screenshot) - [Guide] The Importance of SKUs For Your Online Retail Shop

What Does This Mean?

What it means is that you should be more conscious when SKU is mentioned, as it could be referring to the number of products rather than the barcode.

Like in this article, we will be guiding you through SKU the barcode, as well as some tie ins with products. Don’t worry as we will keep the article as clear as possible! How Many SKUs Do You Need? - [Guide] The Importance of SKUs For Your Online Retail Shop

How Many Characters Does My SKU Need?

Most SKU codes are designed between eight to twelve characters.

Again, these characters can be either numbers or alphabets. You can usually find these printed on the price tag of the products.

How to Set Up SKU Numbers

One thing that you should know about SKU is that the codes act like the abbreviation for your products’ information. This is extremely useful for you and your staff to find and reference the goods from the invoice, lists or order forms.

You can create and mix numbers and letters in your SKU system to make the numbers unique and specifically describe your products. There are 3 easy ways to set up the SKU number, which you can even combine. They are:

  • Using Top-level identifiers
  • Assigning Unique Identifiers to Middle Numbers
  • Finish With sequential Numbers

1. Start SKU Numbers With a Top-level Identifier

This is going to be easier if a product used to explain the whole process. Let’s say that you have a pair of own-made shoes named Lilac that come in three different colors available in size 5. Your product’s SKU number would look like this:

Lilac Shoes, color (red), size (5) = LS-R-5 Lilac Shoes, color (black), size (5) = LS-BK-5 Lilac Shoes, color (pink), size (5) = LS-P-5

‘LS’ is the abbreviation for the name of the shoes, Lilac Shoes, followed by the colour codes ‘R’ for red, ‘BK’ for black, and ‘P’ for pink. Finally, ‘5’ is the size of the shoe.

It is common that the first two or three digits or characters for any SKU number describe a top-level identifier. Some may assign their SKU number to represent the department, store category or the supplier of the product.

If you sell in multiple stores, you can use include numbers for different locations. This makes it easier for you to distinguish each branch and the stock available.

2. Use the Middle Numbers to Assign Unique Identifiers

Creating an easy but unique SKU number can really help you keep track of your products.

You can assign the middle section of the numbers with specific features like the colour, size, item type or subcategory that describe your products. These features will make sense during your inventory checks as everything is arranged accordingly.

The difference between this, and the top-level identifier is simply having your product specifics in the middle of the SKU, rather than the first.

MY-KL-LS-R-5-0029 MY-KL-LS-P-5-0029 MY-PN-LS-R-5-0035

In this example, the top-level identifiers are the country ‘MY’ Malaysia, and it’s states ‘KL’ for Kuala Lumpur and ‘PN’ for Penang.

The middle are the earlier codes for the Lilac Shoes, and the final identifier is a sequential number which is covered next.

3. Finish SKU With a Sequential Number

The final step in creating a standardized SKU is to have a numbering system, like 001, 002, 003 or any number that represents the number of your products.

One thing you need to know is, the products can be located easily since SKU numbers are generated by the retailers themselves (you).

You can allocate the final numbers with a supplier product number too or any number that indicates their differences.

You can also create SKU numbers to differentiate the older stock with the newer product. Again, this is to ease your staff to track or reorder for the coming month.

Using the previous example:

MY-KL-LS-R-5-0029-01 MY-KL-LS-P-5-0029-01 MY-PN-LS-R-5-0035-02

We already know the top level and middle identifiers from earlier. For the sequential numbers, ’00XX’ numbers present the number of products, and ‘0X’ represents the supplier in this case.

That said, you will need to create your own SKU system for your own business, which could have either more or fewer characters. This depends solely on your decision and business needs. How Many SKUs (Products) Should I Start With - [Guide] The Importance of SKUs For Your Online Retail Shop

If I want To Sell Online, How Many SKUs (Products) Should I Start With?

You only need 1 product to start selling online; but the actual answer is, it depends on where you plan to start selling.

Selling By Yourself

If you’re selling through your own platforms, then even just a single product is enough to get you started.

Selling In A Marketplace

This differs from one marketplace to another, as some marketplaces allow you to begin with a single product, while others require a certain number of SKUs before allowing you on their platform. For example:

Amazon

There are no restrictions for the minimum amount of products you should have before starting to sell on Amazon; but it is recommended that you start off with 3-5 products.

Lazada

Similar to Amazon, there is no stated minimum number of products within Lazada. However is recommended that you start off with 5 products.

The Verdict

As shown, you can start selling in most cases with just a single product. However, there are a few reasons you may want to start with at least 5 products when selling online, which are:

Customer Expectations

If you only sell one product, you could give off the wrong impression to a customer that you might not be putting effort into your online store, or you might be running a shady business.

More Chances To Be Found

It’s simple math. When selling multiple products, you are more likely to be found by others.

Possible Algorithm Favoritism

The main goal of these marketplaces is to make money. By having fewer products, you are less likely to generate money for these platforms.

As such, you may be pushed down their rankings of sellers that have more products, as they have a higher chance of generating revenue for the platform.

Our Recommendation

For new sellers that want to try out selling products online, we recommend that you should start selling online with at least 5 products ready.

But don’t go too crazy, and start listing hundreds of products to sell, or you will have a nightmare managing the orders.

At most, only list up to 50 SKUs when beginning, just to get a feel for understanding how to manage your online store. When you feel more comfortable, then look to expand your online inventory.

Importance & Drawbacks of SKU for a Business Owner

SKUs are critical in inventory management as they assist retailers in many aspects. It is worth to note that creating SKU numbers for your products has its perks in operating your business while increasing your profits.

Yet, you need to plan well and decide the best SKU numbers that are convenient for the business. Here are some significant benefits of SKUs to a business and the setbacks.

Benefits of Great SKU Management

1. Stock replenishment

As the SKU numbers signify the products that you have, the stock can be easily tracked during an inventory check. This way you would know which products are needed to be reordered to ensure you get the right goods on time.

2. Increased revenue

SKU numbers allow you to recognize which products are being sold quickly. You can track your products by locating the stock that’s needed to be reordered and analyze which goods are popular and ones that stay in the shop for a long time.

Doing this, you will be able to order and sell the right products and avoid ordering products that don’t sell well.

3. Increased gross margins

Ordering the correct stock is essential as you need to ensure your expenses are not higher than your profit. SKUs help you with this matter since you are keeping track of your products you would know the items you currently have.

A well-managed inventory allows you to increase your gross margins as you plan what you buy and what you sell.

4. Increased efficiency

As explained in the previous part above, SKUs help you to keep track of your products and improve the way you organize your business.

This makes your store run smoothly as everything has been categorized through the SKUs numbering system and the arrangement of products will be according to these numbers.

In short, you can avoid overstocking unnecessary goods and fix the appropriate stock levels. Setbacks of Poor SKU Management - [Guide] The Importance of SKUs For Your Online Retail Shop

Setbacks of Poor SKU Management

1. High inventory holding costs

As SKUs help a retailer to keep track of their goods, there are few instances where the unnecessary purchase of stocks to be made.

This may happen when one makes wrong predictions about the upcoming trend thus restock unneeded items. This will cost a lot in storing the products in a bigger storage room and increases your inventory costs.

2. Reduced available capital

Similar to the previous explanation, poor SKU management can drive you to order the wrong products. This would decrease your business capital and you are left with products that are not needed by the customers.

3. Higher fixed costs

If you don’t manage your SKUs in the correct way, you and your employees may tend to make the wrong order and restock at the wrong time.

You need to remember that buying in bulk is cheaper than buying one item at a time. Moreover, these separate purchases may increase extra package or delivery fees which results in higher unnecessary costs.

4. Reduced efficiency

The aim of having SKUs is to make you track your products easily and restock the correct items. Yet, some retailers tend to make the same mistake by increasing the SKUs for a specific product which can cause mistakes in orders.

This will affect the business as customers may realize this and develop a negative impression towards your business.

Conclusion

SKUs can be a tricky thing to handle, especially for beginners wanting to venture into online business. In the end of the day, there is no one way to prepare your SKUs as it always varies from business to business.

With the proper use of SKUs, you will reduce your headache in managing your products and even generate more revenue in the long term.

On the other hand, mismanaging your SKUs will cause you a lot of mental pains, as well as increase unnecessary costs for your business.

Feel a little intimidated on managing your SKUs or managing your online shop?

Then feel free to contact us for a free consultation, as we are the Ecommerce Solution for your online business needs.

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