SKU Analysis: A Beginner’s Guide to Making Sense of Your Data

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Inventory management is the backbone of any product-based e-commerce business. However, it is often one of the most mismanaged aspects of any company that is still in its nascent stages. 

According to a study by Zebra, reducing stockouts and over-stocks can cut inventory costs by 10%. To achieve this, it is crucial to understand inventory levels to offer reorder points and build offer bundles for clearance for appropriate SKU management.

SKU analysis helps perform these activities in a quick and efficient manner. This article shall guide you through the process of performing SKU analysis and its importance in the life of a business.

What is SKU analysis?

The process used to monitor inventory and interpret data at the SKU level to obtain applicable insights is known as SKU analysis. It includes the analysis of inventory levels to determine the availability of a particular product or SKU. Based on the extracted data, one can reorder inventory. SKU analysis is a crucial part of catalog management.

This form of inventory analysis is also vital in recognizing what products move at a slower pace and which ones have a high demand. It also looks at the profitability of various products through the analysis of their carrying costs

Through a combination of these metrics, businesses can manage their inventory more efficiently and create better opportunities for profitability for themselves.

Benefits Associated with SKU Analysis

Despite its thriving reputation, SKU analysis is extremely tough and laborious, requiring much manual involvement. Several businesses also forgo this process to save time and resources. However, employing this process allows a business to experience significant financial outcomes and efficiently use storage space. 

Here are a few more reasons why you should consider investing time and money into SKU-level analysis.

Benefits of SKU Analysis

  1. Manage SKU Proliferation
    1. Investing in SKU management enables strategic product selection.
    2. Identify top-selling items for stock improvement and expansion
    3. Understand audience through SKU-level analysis for better product development.
  2. Monitor Product Performance Across Different Channels
    1. Quick issue resolution through effective product performance monitoring.
    2. Plan distribution and marketing strategy based on insights.
    3. Flexibility in allocating resources for optimal results
  3. Clearer Cost-Analysis
    1. Analyze individual SKUs to identify underperforming products.
    2. Identify additional costs like online store maintenance and overhead fees.
    3. Reduce losses by tracking marketplace charges and optimizing sales.
  4. Measure ROI And Improve Investment Decisions
    1. Identify underperforming products to boost revenues and eliminate losses.
    2. Optimize marketing strategy for maximum profitability.

  • Manage SKU Proliferation  

The natural course of a business’s growth often entails the introduction of new products or variations of older products. However, this process of SKU proliferation, if left unchecked, can contribute to severe losses for the company and clutter up storage space.

Investing in SKU proliferation allows you to remain strategic about the products that you introduce to the supply chain. Moreover, it enables you to identify items that sell best and work around improving and expanding the stock for those. In addition to this, SKU-level analysis also becomes a crucial part of understanding your audience and driving your product development efforts accordingly.

  • Monitor Product Performance Across Different Channels

Determining how any product performs is a critical aspect of how quickly and effectively you address issues with it. SKU analysis allows you insight into customers’ purchase patterns and habits. It helps you plan your distribution and marketing strategy and allows more flexibility regarding the company’s performance. This practice also enables you to adjust and invest resources wherever they will yield the best results.

  • Clearer Cost-Analysis

The cost of running a business is not limited to shipping, software, and advertising. There are always additional costs, such as those involved in maintaining an online store, overhead fees, and marketplace charges. These expenditures are all part of the profitability of a company. Applying them at an individual SKU-level allows you to determine the products that may not be performing as well. 

Marketplaces have their own costs, and tracking the numbers mentioned above can be beneficial in helping you reduce losses with every sale. 

  • Measure ROI And Improve Investment Decisions

Tracking expenditure across SKUs can be incredibly useful in helping you redistribute funds and create a more profitable marketing strategy. The underperformance of merely one product can have a massive impact on the revenues and cost you losses. With a proper SKU management plan in place, you stand to eliminate these losses by tracking down products that do not generate revenue.  

How To Determine SKU Profitability

Keeping track of individual products is a mammoth challenge for any business. Hence, companies often skip this part of the process and only analyze how their company is performing as a whole. Nevertheless, analyzing individual SKU profitability is crucial to identifying SKUs that might need work or complete elimination altogether.

Moreover, it is vital to ensure that you have an understanding of the best-performing SKUs as well. These are the drivers of most profits, conversions, and customer loyalty. They are what contribute to e-commerce success and help bring new users to the store.

Tips to Implement SKU performance analysis 

SKU analysis is a vital component of business success. But how exactly do you implement to extract the best from it and improve the inventory system? Efficient SKU analysis is heavily dependent on having a clear understanding of what to look for and how the extracted data can contribute to profitability. Below are some of the most valuable tips that can help your business. 

Tips for SKU performance analysis

  • Perform SKU rationalization
    • Measure product profitability
    • Determine whether to continue stocking or discontinue an SKU
    • Identify slow-selling SKUs draining profits and occupying storage space
    • Free up costs by reallocating resources to better-performing areas
  • Estimate expensive SKU proliferation efforts
    • Analyze SKU proliferation to avoid unnecessary costs and storage issues
    • Slow-moving SKUs decrease revenue and increase holding costs
    • Identify problematic SKUs through analysis and find solutions
  • Employ inventory management software to extract crucial data
    • Utilize inventory management system for SKU-level analysis and prediction using historical sales data
    • Track crucial inventory metrics
    • Accurately measure profitability by recording warehousing costs per SKU

Perform SKU rationalization

SKU rationalization is a vital step in the process of SKU analysis. It entails measuring the profitability of a product using metrics such as holding costs, fulfillment costs, procurement fees, customer acquisition expenses, and historical sales data. SKU rationalization helps a business identify whether a business should continue stocking a particular SKU or discontinue it altogether.

Using this process, you can also determine whether a particular SKU is selling slower than others, therefore, losing you money on holding costs while offering meager profits. This can provide concrete insights into why you should stop producing more of the item and free up costs to invest in better-performing areas. 

Estimate expensive SKU proliferation efforts

SKU proliferation isn’t necessarily harmful. However, they tend to take up unnecessary space and additional costs during production and storage if they fail to perform well. In such a case, analyzing SKU proliferation is necessary to ensure growth instead of losses within a company.

For example, customers may experience the paradox of choice or find that a particular product does not solve any key pain points, adversely affecting business. This will lead to the SKU turning in no profits since they’re slow-moving. However, these SKUs will continue to take up storage space, causing revenue to fall while increasing holding costs.

Through SKU analysis, you can quickly identify the SKUs causing these issues and explore ways to address the issue. This may range from bundling best-selling products with slow-moving SKUs or even expanding the target market in case the SKU is higher priced.

Employ inventory management software to extract crucial data

To efficiently conduct SKU analysis, ensure that you’re tracking the most crucial inventory metrics, such as historical sales history and average units sold per day. This will allow you to understand how well the product has been faring over time. In addition to this, you will also need to record how much you spend warehousing for every single SKU to measure the profitability accurately.

In this case, using an inventory management system can aid greatly. These come with advanced features that help you record Sku-level analysis metrics and accurately predict the expected uptick in demands using historical sales data.

The SKU Productivity Formula

DC managers generally use the 80/20 rule when studying their SKU productivity. This formula dictates that 20% of the SKU account for 80% of the sales made by a company. The other 80% of the SKUs are slow-moving and block capital and storage space. However, SKU analysis can help bring this into perspective and help establish a clearer picture of the SKUs and their effect on the business. 

The different KPIs that you should take away from an effective SKU analysis can include the following:

  • Fast-moving, slow-moving, and non-moving SKUs
  • The financial performance of these categories on the business operations
  • Storage occupied by each category of SKUs

All of this information can contribute significantly to eliminating any SKUs that are not worth retaining, hence, saving you money, human resources, and storage.

Wrapping Up

Companies can improve their investment choices and improve the health of their portfolios by using SKU analysis to gain SKU-level insights. Businesses can proactively stop investing in underperforming SKUs and instead focus on investing in bestsellers based on predicted information, therefore, saving costs. Additionally, they can monitor the evolution of all SKU performance.

Organizations also benefit from a competitive edge over rival businesses that have not embraced this technology thanks to real-time analysis. Moreover, the automation speeds up the entire SKU rationalization process by giving team members easier access to more detailed information.

Moreover, when you partner with a 3PL provider like Locad, you stand to obtain an analytics dashboard and inventory management further simplifying your SKU-level analysis efforts. So don’t second guess SKU analysis. It can become the difference between the success and downfall of your company!


What is SKU in a product?

An SKU or a Stock Keeping Unit is an alphanumeric bar code printed on a label on the back of a product in retail stores. The label is a unique code used to track the movement of the stock or inventory.  

Why is SKU analysis important?

SKU analysis is essential for identifying which products move more slowly and which have significant demand. It also considers the profitability of various items by analyzing their carrying costs. Businesses can more effectively manage their inventories and improve their chances of profitability by studying these measures.

How is SKU productivity calculated?

To calculate SKU productivity, divide the total number of SKUs in a range by the total number of SKUs and multiply it by 100. This is also called the formula for SKU percentage.

What is SKU efficiency?

When merchants assess the efficiency of their SKU assortment, it is known as SKU productivity, also known as, SKU rationalization. To gain the whole picture, they typically take into account strategic, economic, and customer expectations.

What are the different types of SKUs?

There are a total of 6 types of SKUS. They are standard, component, assembly, bundle, collection, and virtual SKUs.

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