Sell through rate is a calculation, commonly represented as a percentage, comparing the amount of inventory a retailer receives from a manufacturer or supplier against what is actually sold to the customer. The period (usually one month) examined is useful when comparing the sale of one product or style against another. Or more importantly, when comparing the sell-through of a specific product from one month to another to examine trends.
How to Calculate Sell-Through Rate
So, in your store, if you bought 100 chairs and after 30 days had sold 20 chairs (meaning you had 80 chairs left in inventory) then your sell-through rate would be 20 percent. Using your beginning of month (BOM) inventory, you divide your sales by that BOM. It is calculated this way:
Sell through = Sales / Stock on Hand (BOM) x 100 (to convert to a percentage)
or in our example (20 /100) x 100 = 20 percent
Sell through is a healthy way to assess if your investment is returning well. For example, a sell-through rate of 5 percent might mean you either have too many on hand (so you are overbought) or priced too high. In comparison, a sell-through rate of 80 percent might mean you have too little inventory (under bought) or priced too low. Truly the sell-through rate's analysis is based on what you want from the merchandise.
For example, when I made a mistake in my buy (meaning I bought a shoe no one wanted) I wanted a high sell-through rate to get rid of it. Normally if I had too high a sell-through rate, I realized I needed to raise my stocking levels. But in this case, the higher the number, the better. I was simply trying to get rid of it.
The reality is that sell-through rate is a more important metric to a vendor than a retailer. A vendor does not want to take on the cost of manufacturing until it absolutely has too. Tracking sell-through tells the vendor how many months on hand it has of a certain SKU. So, since it is important to your vendor, it should be important to you.
I used to keep a scorecard by a vendor for my store so that when I sat down with them, I could show them how their sell-through compared to other vendors in the store. Often times, this technique helped me get better pricing or markdown dollars or even free freight on my orders in order to get that vendor's sell-through rate to match the others.
Inventory Turnover vs. Sell-Through
In contrast to inventory turnover, sell-through is relating what percentage of your inventory you are moving through in a month. Inventory turnover, while relatable for a month, is looking at a year period of time. One month is too short of a period to use turnover, so sell-through is a better analysis. Many retailers have tried to connect the two numbers (in other words trying to see the correlation between inventory turnover and sell through) but it is a mind-numbing waste of time.
Manufacturers often create promotions or special advertising in an effort to increase the sell-through rate of their products at the retail level. They will use special funding called "co-op" to aid a retailer in moving product out of the retailer's store. If you are not accessing these funds, you need too. They are available as advertising funds or sometimes actually cash to use for markdowns of your inventory.
The longer an item stays on your shelves the more money it is costing you. While it may not seem like it is costing you money, sell through helps prove it is. Always remember, the space that products are occupying could be given to a product with a strong sell-through rate.
And dead stock ties your open to buy dollars as well. Meaning, you cannot order fresher, better products until you sell through what you have now. Monitor your sell-through rates and keep your store fresh and engaging for the customer to improve your bottom line and the customer experience.