What Is the Meaning of 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 be helpful when stores need to know when to reorder products and which items move quickly versus those that don't so they make decisions about what to keep on their shelves. To help track their products, retailers assign a stock keeping unit number, referred to as SKU.

Why Use a SKU?

The stock keeping unit (SKU) does more than just identify a product. It also tracks the price, product options, and manufacturers of the merchandise. A SKU is used to track inventory and can make tracking data about your sales easy so you can maintain a profitable retail business

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 SKUs Are 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 want to track.

For example, a shoe store might classify shoes based on customer type (men, women, and children), then style (dress or casual), color, and perhaps material. Larger shoe stores may break down categories even further, such as into heel types or season.

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

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. 

Other Uses for SKU

Inventory management is the core function of an SKU, but it can also improve the customer shopping experience. Today, a store assistant can scan a SKU to find out quickly what is in stock for a consumer that might want an alternative version of the product. 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 advertise their SKU instead of the manufacturers model number. Doing so makes it more difficult for a consumer to find the exact model at another store and makes it more reduces the price matching from rivals. It also helps reduce the practice of consumers visiting stores to compare prices for items they intend to buy online instead.