What is a SKU and How Should You Use It?

In the world of retail-related acronyms, SKU is likely one that you’ve heard a million times, but you may not know what it means. So what is a SKU?

SKU stands for “stock keeping unit” and – as the name suggests – it is a number (usually eight alphanumeric digits) that retailers assign to products to keep track of stock internally, once it arrives from a warehouse or distributor.

SKUs vs. UPC codes

In offering an SKU definition, it’s important to flag how the format differs to UPC codes. You may have heard SKU and UPC used interchangeably. They are similar but serve different purposes for retailers.

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A UPC, or universal product code, is a 12-digit numeric code that is attached to products wherever they are sold, for external use. (It’s often referred to as a “UPC code”, awkwardly translating to “universal product code code”.) UPCs generally appear alongside a machine-readable barcode.

A product has the same UPC no matter where it’s sold, but different stores assign it different SKUs. A stock keeping unit is typically unique to a single retailer.

Then again, there are a lot of retailers that use UPCs as SKUs. But smaller shops (especially those that make their own products) may find it beneficial to create their own SKU system.

SKU vs GTIN codes

Stock keeping units and UPCs aren’t the only codes you’ll need to consider when putting together an effective inventory system. Global Trade Item Numbers (GTINs) are another piece of jargon worth getting your head around.

The main thing to understand is that while SKUs are generally for internal use within a specific business, GTINs are external. They stay with a product throughout the supply chain, from the original manufacturer and warehouse onwards.

Each GTIN is designed to be unique so an item can be identified and tracked quickly across international borders. Whereas SKUs can change from store to store to help track inventory internally, a GTIN should stay the same – whether a product is in a warehouse, with a distributor or in a shop.

Common types of GTIN include:

  • Universal Product Identifiers, which are 12-digit codes mainly used in the US.
  • GTIN-8, an eight-digit format often seen outside North America.
  • European Article Numbers, which contain 13 digits.

Learn more about the differences between SKUs and GTINs with our helpful guide.

SKU management

If you’re going to use SKUs, their management is incredibly important. SKU management allows you to analyse the cost of carrying each product so you can be sure that every piece of inventory meets the financial objectives of the business.

When done well, SKU management allows you to optimise your inventory levels and purchasing (and increase revenue). If done poorly, you have high inventory holding costs and less available capital.

You can manage SKUs manually or you can take an automated approach.

Manual SKU Management

If you go the manual route, you need to calculate two metrics — SKU ratio and sales ratio — and then compare them.

Calculating SKU ratio

Start by making a list of all your SKUs in a spreadsheet. For each SKU, note the price, how much it cost you and the gross profit. (Subtract your cost from the price to determine your gross profit.)

Then create gross profit ranges in your spreadsheet (less than £20, £20–£29.99, etc.) and note how many SKUs fall in each range. Divide the number of SKUs in a range by the number of total SKUs (and multiply by 100) to get your SKU ratio for each range.

Calculating sales ratio

Using the same gross profit ranges, note the number of units sold (in a given period of time). Then divide the number of units sold in each gross profit range by the total units sold (and multiply by 100) to get the sales ratio for each range.

Examining your findings

In a spreadsheet, compare the SKU ratio and sales ratio of each gross profit range. (If you’re more of a visual person, you can also plot this information on a graph to see how your SKU ratio compares to your sales ratio.)

Your best-performing products fall in the gross profit range that has a sales ratio significantly higher than the SKU ratio. It means there is high demand for those products (and potential for generating more sales if you increase inventory or marketing).

Your gross profit range where the SKU ratio is higher than your sales ratio? Those are your worst performers. It means there is too much supply and you should reduce inventory and marketing (or even stop selling the products).

Automated SKU management

That whole process may seem a little tedious, but don’t worry, you can automate SKU management. Automating your SKU analysis reduces costs and improves the accuracy of your data.

To automate the process, you want to leverage POS systems with integrated inventory management and other tools like barcoding. Using software to manage your inventory allows you to electronically track items in real time and automatically update inventory. In addition, built-in analytics help you create more efficient purchasing processes and more effective sales and marketing strategies.

Managing SKU numbers with Square for Retail

Looking to manage stock keeping unit numbers and print barcode labels, all in one place? Square’s retail POS system has the answer.

To start, you’ll need to generate SKUs for your products. You can do this manually or with the help of an SKU generator tool. Just remember to build information like the item type, size and colour into your codes.

You’ll then be able to start logging different products into your Square Dashboard. Just follow these easy steps to set up a new product:

Click ‘Create Item’ in your Dashboard.Enter all the relevant information about the product, including a photo and its SKU number.Fill in any variation information, such as sizes, prices, and how many items are in stock.

Organising your inventory is also very straightforward. You’ll have the power to set up different categories (for example, clothing or shoes) and assign different products to them.Once you’re all set up, head to the ‘Inventory Management’ section within your Dashboard to start printing labels. Select ‘Stock’ and ’Print Labels’ to get going.

If you’re not yet ready for the world of SKUs, try Square Point of Sale to help you manage your business.