After generating SKUs, you can keep track of what stock enters or leaves your retail store. That much is certain. But it’s not the only reason why you should use them. They also assist you to track and monitor the overall performance of your categories, sub-categories and even individual products.
What is a SKU?
A SKU, pronounced ‘skew’ and written out as stock keeping unit, is a method you can use to differentiate one item you stock from another within a department, category as well as across your entire store. Even simpler, it is a unique identifier for each of the products that you sell.
Before we continue, it’s important to note that a SKU isn’t the product itself. Instead, it’s the identification code made up of six to eight characters that represent each distinct item type.
Here’s an example to further illustrate our point.
Let’s say that you’re a pharmacy retailer that stocks Household goods. Within this section, you’d range various categories, one of which happens to be Pet Care. And within Pet Care, your customers could find multiple dogs toys such as tennis balls, squeaky footballs and other chewable playthings.
Now, when you first created your classifications for the Pet Care category, you used the term ‘DG’ for dog toys, then ‘B’ for balls, and ‘TB’ for tennis balls. After that, you included a number for the order in which the products were captured on your inventory management system.
Here’s what the above product would look like as an SKU in your store: DG-B-TB-001. You could go even further to add in other codes to signify colour, shape, or weight depending on how much detail you want to include.
Of course, the SKU you use in your store won’t be the same as the one used by your competitor. That’s because while they are alphanumeric by nature, there is no standard format to follow.
So long as you have a system that allows you and your staff to quickly identify the product that a customer asks after, and you can keep track of what comes or goes out of your store, you’re free to choose how to label your items.
What are some common misconceptions about SKUs?
As we noted above, a SKU does not refer to the product itself but rather an identification code allowing you to distinguish one item from another. But that’s not the only misconception. There are plenty more.
Another common misunderstanding is that your SKU code can be used interchangeably for a Barcode, EAN or UPC. While they do all relate to your product, they fulfil different roles.
The barcode, for example, is usually the unique identifier supplied by your supplier, which means that if you want to resell their products but don’t provide an internal SKU to each item that you stock, you could end up confusing yourself.
Meanwhile, your EAN or UPC barcodes, which are scannable, are universal codes given to products in the market. Since SKUs are internal and thus unique to your business - they aren’t regulated - while one item may have the same UPC code across the entire market, they’ll have different SKUs depending on if they are in your store or at a competitor’s.
Also, a UPC barcode is numeric only and at least 12 characters long.
What can make the process of inventory labelling even more confusing is that for the most part, you can have close repetition on a stock keeping unit. Since your codes are not locked to a single sub-category, if you’re not careful, you could find yourself creating very similar codes for two different items.
For example, if you used numbers instead of letters, one product could be 10-11-12-B, which might be frozen pizza, while another is 11-11-12-B, which happens to be a children’s dinosaur toy.
It’s best practice to use a combination of numbers and letters in your SKUs. It’s best practice to keep it short and simple too but not so short that it’s confusing to your staff and becomes meaningless.
What role do SKUs play in category management?
If you search online for the origins of the concept of SKUs and UPCs, you’ll likely come across the story about the 10-pack of Wrigley’s Juicy Fruit chewing gum. It was the first product scanned at a check-out counter and set a precedent as the way forward for keeping track of stock coming in and out of a retail store.
But what does this have to do with the role that SKUs play in category management? In short, everything.
A SKU allows you to track your inventory throughout the supply chain. It also helps category managers to group products with similar attributes so that they can determine their relative performance and decide on whether to keep or discard them from product assortments.
Let us explain:
As noted here, category management is the process of organising product groupings as independent business units aimed at producing positive business results by delivering value to your customers. In other words, it’s an opportunity for you to provide your customers with what they want, where they want it, and when they want it.
However before you can get to that point, there is the six-step process to consider. And within the very first step - defining your category - you’ll note the importance of SKUs. You need to decide on the specific stock keeping units that will make up your category. This step includes developing your consumer decision tree so that you can better understand the buying habits of shoppers.
You’ll find SKUs referenced again in the third step - insight generation as well as in step four - strategic and tactical planning.
Insight generation revolves around competitor research, sales data and in-depth analyses and allows you to see spot opportunity gaps that could help you offer a better product selection.
Meanwhile, once you’ve assessed your category, it’s time to look at the merchandising strategy that will help you to fulfil the role you’ve given it. Regardless of the role you give your category, the strategy you choose will need to consider your SKUs.
For example, if you want to follow a Destination or Seasonal role, you could make use of a traffic building strategy, which includes stocking your best performing SKUs. If you are pursuing a profit generating strategy, you would be better off merchandising these SKUs in an area that has high foot traffic.
Lastly, since SKUs play a significant role in data analysis, you could evaluate your success (or failure) by planning a category review. This includes monitoring your category, ensuring it is performing as it should and that it has received the necessary shelf space allocation, and if not, make changes where necessary.
With integrated category management software such as DotActiv Enterprise or Pro, you have every possibility of not only tracking your SKUs but selecting those that will offer you the best return on your investment. You can visit our online store here or click below to find out more.