How to Create SKUs for Scale: A Guide for High-Growth Brands
What is a SKU?
A SKU (Stock Keeping Unit) is an identification “number” which consists of a unique series of letters and numbers. The SKU is also the SKU number and product code. Merchants assign SKU numbers to products. The SKU number is often visible to the consumer as well, typically on the label, tag, or somewhere on the product page online.
The SKU is used to identify items on lists, invoices, order forms, and within your POS and inventory management software. It helps retailers track where an item is at any given point in time.
What a SKU is not
SKUs are often confused with other identification numbers, but each number has its own purpose. Here are a few other IDs that products may have:
- UPC: A Universal Product Code is a global identifier made of 12 digits; this is the barcode that you scan in warehouses, at the point-of-sale, etc.
- MPN: The Manufacturer Product Number is the code from the manufacturer. Including this in your SKU would expose your supply chain.
- Barcode: The barcode is the UPC and EAN.
- EAN: The International Article Number or European Article Number is also a global identifier, though this is comprised of 13 digits. It’s often mixed up with the UPC because both exist as a barcode and alphanumerically.
Why SKUs are important
The importance of SKUs essentially boils down to operational organization. Coding your products helps not only your internal teams keep processes streamlined and data intact, but also your customers. And when your SKUs are disorganized, this can make retail operations nearly impossible.
For one, managing a long list of SKUs gets cumbersome fast, especially for high-growth brands with lots of product launches and variants. Plus, maintaining a balance between too simple and too complicated in your SKU naming can be difficult.
If you get too granular and specific, you might hinder the actionable insights you’re able to glean from reports. But if you’re too broad, you could find yourself running out of SKU numbers. In that case, you’ll have to start a new SKU naming system, which opens a whole new list of challenges when expanding your product collection.
To successfully scale into the future, you have to set yourself up for success in earlier stages of your business. Even though you might have a limited number of SKUs now, that doesn’t mean it will stay that way.
Let’s dive into some of the other benefits of SKUs:
SKUs capture a range of identifying information, making it easy to group products together based on different characteristics. So when you have SKUs, product reporting becomes more robust and has deeper insights for your brand.
For rapidly growing brands in particular, this is great data to have on hand. Beyond seeing which products are most profitable, you can also learn which specific variants are most (and least) popular. Consider which attributes your most popular items have in common. Knowing this information can (and should!) inform marketing campaigns, cross-promotion strategies, pricing, and product development.
This also allows you to forecast more accurately, as you have detailed information about sales trends. Accurate forecasting reduces your susceptibility to costly stockouts and overstocks.
Better customer experience
Because SKUs allow for more operational organization, this ensures a smooth customer experience. Fast shipping, knowledgeable customer service, and product availability are just a few things consumers demand of brands — and SKUs are one small piece to that puzzle.
Plus, by using the data you gain from SKUs, you can provide more strategic and relevant product recommendations. Data-driven cross-promotion and upselling will help you recommend products and variants which are often purchased together — both online and in-store (or even product bundles).
And as we briefly mentioned before, SKUs aren’t just for retailers tracking their goods. Customers also refer to SKUs during the purchase process. If they have questions about their order, they can use the SKU on their invoice. Or if they want to purchase another, they can search your site by SKU or ask your customer service team about the SKU.
Improved employee morale
A standardized product reference language makes it easy for your team to search, find, and sell your products — especially across a multi-vendor product catalog. When day-to-day operations are smooth and stress-free, employees are more likely to enjoy their working environment.
Improved employee morale can help you reduce turnover and maintain a motivated team. For high-growth brands in particular, it’s essential to have a staff who feels motivated to push the boundaries and play an active role in your brand’s growth.
Save time and money
Because SKUs help you achieve optimal inventory levels, this enables to you reduce associated expenses. Carrying costs being the most obvious, the less stock you need to have on hand, the less it costs you to have it.
Some inventory management software will also automate many tasks for you, based on SKUs. This reduces the amount of time you need to spend manually managing these processes. Stitch, for example, automates multichannel integration by linking channel inventory to Stitch inventory by SKU.
Minimize inventory issues
Implementing a SKU numbering system for your brand can improve inventory control — namely, out-of-stocks and shrink. Some of this is closely intertwined with the other benefits we’ve seen: Improved employee morale may lead to less internal theft, deeper reporting can reduce stockouts, and positive customer experience can boost cash flow.
Let’s start with shrink. In 2017, shrink cost retailers nearly $100 billion globally. SKUs are specific identifying numbers, which means it’s more difficult for an item to go missing. If a SKU is unaccounted for, it’ll be noticed, and you’ll be able to pinpoint where exactly it dropped off the map.
Next, we’ll look at out-of-stocks. Consider this: One-fifth of Amazon’s revenue comes from customers who first searched for a product elsewhere, only to find it out of stock. You can use SKUs to determine reorder points, which will mitigate stockout issues. These reorder points are specific to the variation, so you won’t risk ordering variants that no one wants — and not enough of the ones that people do.
How to manage SKUs as a high-growth brand
If your SKUs are disorganized, this can wreak operational havoc on your business. And if they stay disorganized, these issues multiply, which can lead to confusion, frustration, and inaccuracies. As your business grows, these challenges also continue to grow.
Your tech stack is a major asset when it comes to SKU management. The two most important components are your inventory management software and your POS (if you operate in a brick-and-mortar location). Look for SKU management features, such as duplicate SKU protection.
It’s important to create your own unique SKUs instead of using existing codes from manufacturers and other partners along the supply chain. This will avoid unintentional mixups.
SKU numbers are typically symbolic of the item’s characteristics. Depending on the retailer and their internal naming system, it can tell you the color, material, variant, model, style, size, shape, brand, gender, warranty, price, or other identifying characteristics. If Store A and Store B purchase the same leggings from a supplier, the SKU will likely be different for each seller.
There’s no industry standard for SKU naming conventions, but there are some best practices you should follow:
- Stick to 6–12 digits. Any shorter won’t give you enough variety, and any longer could get too complicated and unwieldy to manage. Many 3PLs will limit you to 16, and you never want to go beyond 32 characters.
- Never use the number 0 or the letter O. The number 1 can also get mixed up with the letters I and L. And stay away from symbols, punctuation, and spaces altogether. Only use dashes, if needed.
- Make it easy to understand. Be straightforward. If it’s a size extra small, use an X instead of 1, for example.
- Go in order of importance. The most significant characteristic of the item goes first (such as the grouping, collection, or most-asked-about details), while the least important should go last.
- Keep the formatting simple and consistent. Stick with numbers, capital letters, and separators such as dashes or dots.
- Avoid using a manufacturer’s part number. This exposes your supply chain and doesn’t scale across multi-vendor product catalogs.
For high-growth brands, an additional consideration is whether the naming convention lends itself to an ever-expanding catalog of products. This means going as specific as logistically possible. If you keep your SKUs too generic, you’ll run into the issue of duplicate SKUs — which can cause operational chaos.
Remember, there is no hard set of rules for how you name your SKUs. What works for one brand may not be the same as what works for another. It’s about determining your goals and paint points and setting up a system that works around that.
Consider your business goals when organizing SKUs
As with many things in business, there is no one-size-fits-all approach to SKU management. It’s all about what your business goals are and what works for your team.
Regardless of how you do it, organizing SKUs is crucial to sustainable business growth. If you set yourself up now, you’ll have an easier time scaling in the future.