Inventory Sell Through Rate: How to Forecast Demand Accurately
Why is the sell-through rate significant? Retailers need to forecast demand to know how much they should purchase.
Buying too much inventory will cause a retailer to have more stock than they need, while not purchasing enough could lose money because of lost sales.
It is essential to maintain a stock of merchandise because retailers lose an estimated $1.1 trillion globally due to overstocking and under-stocking items. To avoid these problems, you must know when to reorder inventory, how much should be ordered at one time, and approximately how long each product will take to sell.
One way to predict demand is by looking at the sell-through rate. If it is high, then there will be a lot of customers, and you can expect more sales; if not, then that means people are less interested in your product or store.
What Is Sell Through Rate?
A retailer’s inventory sell-through rate is the ratio of products sold to how many they purchased from a manufacturer. Retailers use this number to estimate how quickly they can turn their initial investment into revenue.
More than knowing how much and quickly they’re selling a product, retailers should also be aware of sell-through rates to help them know whether or not their inventory is turning over efficiently. If the store isn’t moving products at an appropriate pace, it can lead to storage costs and discounts for items that are no longer in demand.
Why Measure Sell-Through?
To be a successful retailer, knowing which manufacturers supply the best products is necessary. Sell through helps merchants understand how quickly their inventory sells from certain suppliers and if they should continue working with them.
Understanding the supply and demand process makes it easier to predict what will sell. This allows merchants to plan their inventory purchases more efficiently, not overstock or understock items.
Sell Through Rate and Inventory Management
A delicate balance needs to be found between the number of items a retailer holds and their ability to sell them at a total price. Keeping too many means they will have difficulty selling all goods, but not having enough can mean customer demand is unmet.
Retailers can calculate the sell-through rate by type, category, or brand. This will tell you whether investing in products from that manufacturer is worth it.
A high sell-through rate means that a retailer can move inventory quickly. This ensures the highest gross profit margins possible.
On the other hand, if you have a low sell-through rate, you are not selling products as quickly as expected. This can lead to inventory becoming discounted and impacting profit margins which will, in turn, lower your ROI.
Sellthrough rates are not always a clear indicator of whether or not there was demand from customers. Sell through rate is affected by seasonality, style, and the social currency known as hype.
You can’t know what’s wrong with a product by looking at sell-through rates. You need to explore trends and get feedback from your customers to find out why it isn’t selling.
How to Calculate Sell Through Rate
The sell-through rate is calculated by dividing the number of units sold by the number received and multiplying by 100.
Many retailers have an inventory turnover rate that is every 30 days. After 180 days, the product becomes dusty, and it should be discounted to make room for new products with a higher markup.
Sell-through rate formula
(Number of units sold ÷ number of units received) x 100
Sell-through rate example
When a retailer buys 100 units of an item and then sells 75 within a month, that particular product has a sell-through rate of 75%.in within 30 days.
Sell through rate = (75/100) x 100
Sell-through rate = 0.75 x 100
Sell-through rate = 75%
How to Improve Sell Through
A retailer can improve their product sell-through by reducing its price, but this will only work if they also reduce fabric quality. Another solution would be to increase advertising and marketing spending to promote products on social media.
1. Launch a promotion
Giving promotions and discounts away too often can result in lowered profit margins. But offering discounts might make sense if the product is no longer in season or if the items left are not that sellable.
If your inventory is not selling as quickly as you would like, it might be because the initial order was too large.
2. Order less
In the provided example, the issue is that the merchant ordered too many to begin with. If they had only bought 75, their sell-through would be 100%.
Before purchasing inventory, please do your research to ensure that the product is worth it.
By monitoring sell-through and using point of sale systems, it is possible to make better inventory purchasing decisions. Rather than buy too much or too little product, you can order the perfect amount that will meet demand without overflowing your stockroom with unsold goods.
The Limitations of Sell-Through
Sell through rate is an excellent way to see how quickly certain manufacturers or suppliers sell, but it cannot be used as the only metric for forecasting demand.
When it comes to understanding customers, retailers should know the local market and what is trending in their space. For example, knowing your customer can help you know them better.
- Are the products in demand all year?
- How do customers feel about sizing, colors, and fits?
- Do customers prefer certain brands?
- Do your customers follow trends quickly?
There are a lot of different ways to get the information you need. It’s not just about looking at your sales reports; there is also staying informed by what trendsetters and fashion designers say, as well as knowing who your customers like.
For example, it is not enough to rely on complex numbers because qualitative research can provide valuable insight into demand.
Final Thoughts on Sell Through Rate
When a retailer is looking to maintain cash flow, they need to know when and how much an item will sell. Some merchants use their intuition alone, while others rely on data from reports or industry trends. Retailers should also be able to understand what products are popular with customers.
By taking the time to create a purchasing plan, retailers can better predict how much money will come in and out of their business. It takes more work, but it is worth the effort.