What Is a Stock Keeping Unit (SKU)?

Definition & Examples of Stock Keeping Units

Definition of SKU

The Balance / Michaela Buttignol

The stock keeping unit (SKU) is an alphanumeric code assigned to inventory that allows retailers to track their stock, measure sales by product and category, design store layouts and flow, and enhance shopping experiences. These codes are designed by retailers based on criteria they deem important.

Stock keeping units have many uses beyond identifying a product. It's important to know what these codes are, and how to design one. You should also become familiar with some of the other ways they are being used so that you can design your inventory management system and customer experiences.

What Is a Stock Keeping Unit?

A stock keeping unit is a unique identifier for an item sold by a retailer. Retailers create their own codes based on various characteristics of their merchandise. Typically, SKUs are broken down into classifications and categories. For instance, a home improvement store has different sections, such as hardware or lawn and garden—their SKUs might be designed around their lawn and garden classification, and have numbers or letters designating products as categories within the lawn and garden section.

Unlike universal product codes (UPCs), SKUs are not universal. This means that each retailer has its own set of SKUs for its merchandise. 

How a SKU Works

SKUs work to differentiate products from each other. It would be difficult to track sales and inventory without classifying them by make, model, type, color, size, or any other identifying traits.

For example, assume a retailer for a new locally owned lawn and garden store needs to come up with SKUs to begin their inventory procedures. They might assign the letter A to mowers; A1 could signify riding lawnmowers, while A2 might represent pushmowers. The next series of alphanumeric codes be a color indicator, followed by size. The retailer could then assign B2 as red mowers and B3 as black mowers.

The mowers could then be further classified by deck sizes. If 011 were assigned to 42-inch mowers, and 012 were given to 36-inch mowers, a red 42-inch riding lawn mower would be A1B2011; a red 36-inch mower would be A1B2012.

SKU Coding Example
Category Code Item Color Code Item Size Code SKU
Riding Mower A1 Red B2 42" 011 A1B2011
Riding Mower A1 Black B3 42" 011 A1B3011
Riding Mower A1 Yellow B4 42" 011 A1B4011
Riding Mower A1 Red B2 36" 012 A1B2012
Riding Mower A1 Black B3 36" 012 A1B3012
Riding Mower A1 Yellow B4 36" 012 A1B4012

The SKU is then entered into the inventory management system, which is tied to the point of sales system. The retailer is then able to track inventory and sales through detailed reporting. An SKU system also allows retailers to create data regarding their customers, sales, and inventory.

What Are SKUs Used For?

The SKU does more than just identify a product or track inventory. With the information collected, you're given information that can be analyzed to gauge the profitability and efficiency of your retail business.

Analysis

SKUs allow retailers to collect data that allows them to conduct an analysis to determine product popularity or view seasonal and cyclic sales trends in their different customer segments. This analysis grants them the ability to stock inventory that coincides with trends in consumer behavior.

Inventory Management

Inventory management is the core function of an SKU system. With an SKU, retailers are able to track inventory levels, turnover, and flow. They can set inventory levels and timeframes using the information gathered from sales, which can act as triggers for initiating or stopping inventory orders.

Customer Assistance

A store assistant can scan an SKU to find out quickly what is in stock for a consumer that might want an alternative version of a product, creating sales efficiency and customer satisfaction. 

Advertising and Marketing

Using SKUs is in advertising is a modern technique. With the competitive online landscape of retail and everyone matching prices, an SKU allows your inventory to appear unique and enables you to identify marketing techniques that are generating sales based on the product identifiers. Many retailers advertise their SKU instead of the manufacturer's model number.

Doing so makes it more difficult for a consumer to find the exact model at another store while decreasing the chances of competitors matching pricing strategies with the same information. It can also help to reduce the practice of consumers visiting stores to compare prices for items they intend to buy online instead.

Product Recommendations

Companies also use these codes to enhance consumer encounters on their online sales platforms. For example, Amazon.com is able to pick items to display as "suggestions" when you are shopping by using SKUs. The company has simply attached a unique SKU, with all of its identifying traits, to each product. When you look at a blender, the shopping platform can display other blenders that are similar to the one you are viewing.

Key Takeaways

  • SKUs are codes used to identify inventory.
  • The uses include tracking, inventory management, and sales trends analysis.
  • SKUs are designed by retailers to meet their merchandising structure and inventory methods.
  • SKUs can be used to design store layouts and organize inventory to enhance shopping experiences.
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