What Is a Stock Keeping Unit (SKU)?

Stock Keeping Units, or SKUs, are Valuable for Tracking Inventory

Image by Michaela Buttignol​. © The Balance 2019

Retailers use coding systems to keep track of their inventory and take a measure of how their sales are tracking. The use of these codes can make the difference when stores need to know when to reorder products and to get a gauge of which items move more quickly. That can be an important deciding factor in the product mix the retailer keeps on their shelves.

By definition, a stock keeping unit (or SKU) is a number assigned to a product by a retail store to identify the price, product options and manufacturer of the merchandise. A SKU is used to track inventory in your retail store. They are very valuable in helping you maintain a profitable retail business

When accessed in your point of sale (POS) or accounting system, a SKU is a series of numbers that track unique information related to that product.

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

Typically, SKUs are broken down into classifications and categories. Many retailers use the next series of numbers in the SKU to group products together for analysis. For example, 25-10xxx are gas ovens and 25-20xxx are electric ovens. The next number might be a color indicator. So, 25-1001x are white ovens and 25-1002x are black ovens.

How Are SKUs Used? 

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. So when you look at a blender it can display other blenders you might like. But you won't see just any blender, you'll see ones that have the same features based on the SKU information. 

Most POS systems will allow you to create your SKU hierarchy or architecture. Before you create an elaborate system for your inventory, consider what you will truly track.

If you are an independent retailer, the chances that you will track beyond classification is not that likely.

For example, a shoe store might classify shoes based on customer type (men, women, children), then style (dress or casual), color, and perhaps material. Larger shoe stores may break down categories even further, into heel types or season. With an item's SKU, a retailer is able to track its inventory and sales through detailed reporting. This reporting can be shared with vendors to negotiate better terms and dating. 

Have you ever been in a retail store and seen the associate scan the SKU or UPC label to see if there were any more in the stockroom? Inventory management is the core function of an SKU, but it can also improve the customer shopping experience as in this example. Being able to identify electronically your stock levels reduces the time to care for the customer. 

Another great benefit of a SKU is in advertising. With the competitive landscape of retail today and everyone matching price, having a unique SKU can help protect your margins. For example, many retailers will put the SKU in the newspaper (ROP) versus the manufacturer's model number. Shoppers cannot determine if the washing machine they are looking at is the same one as the other store. That means other retailers don't have to match the rivals' prices. It also helps reduce the practice of "showrooming" in your store, where consumers visit stores to compare prices for items they intend to buy online instead.