Stock Keeping Unit (SKU): Meaning & Usage Guide

Updated -   February 3, 2022 at 5:23 pm   |  991 Views

What is SKU? – Definition or Meaning

SKU (Stock Keeping Unit) is a product identifier that makes it easier for businesses to maintain the stock levels of the products internally. In other words, SKU is a unique number or code that is assigned to each product type to keep track of the inventory levels.

The concept of SKU number comes in handy if a retailer, online store, or business offers a variety of products and multiple product variants according to the packet sizes, brands, color, target gender, topping/flavor choices, etc. By assigning a different SKU number to each variant, one can manage the inventory accurately without confusion.

An SKU code represents the various characteristics/attributes of a product or a product variant. In an SKU, the information of these attributes is in descending order of importance of these attributes/characteristics. It means the most important characteristic appears first in the SKU code.

Let’s understand how to form an SKU with an example.

SKU Example

For some peanut butter variants, we can make the SKUs as follows:

SKU for peanut butter unsweetened, creamy 1KG pack can be formed as follows:

PEB-US-CRE-1K

SKU for peanut butter unsweetened, crunchy 925 gm pack:

PEB-US-CRU-925G

Some Important Points About SKU

  1. The use of SKUs is not limited to physical products only. You can also assign SKUs to the services you offer.  
  2. Never use an SKU code of a product you don’t sell anymore again for any other product. It might lead to confusion while maintaining the database. Moreover, you can save this SKU for the future in case you start selling that product again. It would help to maintain the logs for that product type in a better way.

How is SKU different from GTIN, UPC, & EAN?

GTIN (Global Trade Item Number) is an internationally recognized product identifier. GTIN of a product remains unique across the globe.
UPC(Universal Product Code) and EAN(European Article Number) are the specific types of GTIN.

Whereas SKUs are not standardized or universal. Each retailer, store, or company can have its own SKUs. These are for the internal use of a business and are mainly used to track products’ stock internally. So, there is no unique method of creating an SKU.

SKU in Business

How can SKUs be used in business?

Inventory Management

Looking at the definition of SKU, it is clear that you can easily access how much stock of a product type is available in the inventory by searching it in your database through its unique SKU number. So, with a good SKU architecture in place, businesses can easily pinpoint the reorder points for the products. It helps them to avoid unnecessary inventory holding costs & optimize the process.

SKUs make stocktaking much easier. It, in turn, helps in tracking and identifying inventory shrinkage. For those of you who don’t know what inventory shrinkage is, it is the difference between the recorded inventory & the actual inventory. Shrinkage tells about the missing stock and can indicate problems like stock theft or damage. 

Sales Analytics

Simply looking at the SKU code in the sales analytics can help identify which product variants( brand, gender, style, size, color, or even the store) are your best sellers and which are underperforming. Adding a separate attribute for the store in the SKU code is quite helpful to track which store made the highest sale of that product if you are running a chain business. 

Based on these analytics, you can make informed decisions about the inventory levels for these product variants. But, be a bit more careful when making decisions about the slow-moving inventory or slow-selling products. Sometimes, it is not a good idea to eliminate the slow sellers. It is because a slow-selling product that you remove might be an important product to some of your best customers. And if they couldn’t find it at your store, they can take their business elsewhere.

Behavioral Analytics

SKUs are very helpful in knowing consumer interests and can do wonders when it comes to behavioral Analytics.

SKUs define products in terms of their attributes. It means, with the help of the SKU number of a product, you can know the attributes of that product. So, when a customer searches for a product on your online store, with the help of the SKU number of that product, you can show him/her the products that have similar attributes in their SKU number as a suggestion. 

This SKU information works great when-

  • You want to show users similar items based on their search history.
  • You are trying to cross-sell. At the checkout point, you can display related products and sell additional items to a customer based on the products he/she is already buying.
  • You are trying to upsell. At the checkout point, you can show customers the premium or costlier products with additional features. And the customer might end up buying the premium product.
  • A product is out of stock, and you want to direct the customer to a similar product that he/she can buy instead.

SKUs can encourage the customers to make additional purchases and hence, give a boost to your annual sales & profits.

Multichannel-commerce and SKUs

When selling products both online & offline, all channels must share a unified inventory, and each product variation should have the same SKU across these channels. So, when working with multiple channels, you need to get the data in your POS system and online website/app integrated to avoid any confusion. 

SKU and GTIN Barcodes

When using an order management software integrated with the POS system, the SKU code and GTIN code can both be easily associated with a product. It makes products scannable for inventory, tracking, and faster checkout.