SKU Efficiency: How To Calculate Profitability & Improve Business Performance

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Harvard Business Review says that when it comes to motivation, a paycheck is not the only thing. 

This article is about how I learned that a paycheck was not my employees‘ only concern.

I had never met anyone who was just motivated by money, but then I started hiring salespeople and realized that a paycheck is not the only thing they care about.

I conducted a study of over 1,000 salespeople to find out the truth and found that base pay is less crucial to motivation than other factors.

Many businesses make the mistake of focusing on increasing revenue instead of profitability. They lose money even if they meet their goals because management, overstocking, and high shipping or service costs can put them out of business.

When you look at your products, can you tell which ones are doing well and which ones aren’t? Do you know if a product performs better on one channel than another?

If you’re not keeping an eye on your selling costs, then it’s likely that you’ll be losing money with each sale.

SKU efficiency reporting is the solution to this problem.

Tracking each product’s performance and tracking which products are losing money will help you figure out how to fix your problems. Click To Tweet

SKU efficiency data is essential for making intelligent decisions about what to do with underperforming products. You won’t know when poorly-selling products are dragging down your profits without this information.

Poor inventory management can quickly sink a business. We’ll show you how to maximize the profitability of your SKUs by optimizing sound SKU processes and giving you tools for better inventory management.

Benefits and Importance of SKU Management

The difference between a successful business and one that is perpetually struggling to keep up with demand, often running out of inventory or back-ordering products for months on end, comes down to inventory management.

Monitor Product Performance Across Different Channels

A sound inventory management system will not only help you at the macro level but also give insight into which products are impacting your profits when problems arise before they get worse.

With SKU efficiency data, you can gain insights into your customers’ habits and what they like to purchase. It’s integral in understanding how to improve distribution and marketing strategies.

If you want to know precisely how your products affect profitability, it iessentessentialou closely track them.

The best way to see what channels work is by looking at how a product performs on various sites. For example, the products that sell well on Amazon might not perform as well in Walmart and vice versa. This allows you to invest resources more effectively.

Clearer Cost-Analysis 

It’s easy to think of the costs involved in running a business, but you also need to consider overhead fees and marketplace charges. These all affect your profitability – especially if they’re applied per-SKU level – which means that some products might be underperforming.

With each marketplace, there are different costs that you need to account for. Tracking these will allow you to see if your COGS is too high and determine whether or not it’s worth selling on the platform.

Measure ROI And Improve Investment Decisions

If you are using PPC advertisements, it is essential to consider your business’s profitabilityessential. If you can keep track of how much money each product brings in, then will be no need for guesswork on where to allocate advertising funds.

There are many different reasons why items don’t sell. It could be that they’re not in the right place, or it might just take too long to get them on shelves for customers to buy.

How To Determine SKU Efficiency

As your business expands, it can be difficult to keep track of all your selling products, tempting to look at how the company is doing.

It’s tempting to neglect profitability monitoring because of a shortage in inventory, but you can still identify problem items before they drain your revenue. Click To Tweet

The goal is to keep your most popular products in stock and use them as tools for increasing customer loyalty, driving conversions, improving eCommerce sales. You also want to strategically show other items on the site that might be of interest.

Factors To Calculate SKU Efficiency

If you’re not making money on an item, there must be something wrong with it. You need to find out the problem and fix it as soon as possible.

If you want to know how much money your business is making, then it’s essential that you can easily access the data on profit margins by SKU.

• FIFO, or first in-first out accounting, is the best way to track COGS data.
• The other thing that I did not realize was the cost of ordering inventory. This includes any costs incurred for making a sale on an item.
• One of the biggest misconceptions people have about starting a business is not taking overhead costs into account. This includes HR, staff salaries, and equipment, among other things.
• The cost of shipping can be high. This is especially true when you are paying for your carrier’s service, like UPS and FedEx.
• Insurance fees – anything related to product or shipping insurance
• Fulfillment fees are incurred when a company has its products shipped by a third party or Amazon FBA.

SKU profitability reporting will allow you to see how your products are performing compared to other similar items. If there is a problem, this data can be used to fix it before the profits start dipping too low.

When sales begin to decrease, you might think about lowering the price or discontinuing an item. However, if your product is still profitable (even at a lower margin), then consider changing its marketing strategy by advertising it more heavily and try bundling items together.

How to Improve Performance with SKU Efficiency Reporting

SKU optimization, also known as SKU rationalization, determines what products to keep and which ones need work. This helps you improve efficiency by either reducing or increasing inventory.

SKU data can be interpreted in many ways. Some methods are more straightforward and involve observation, while others take a more profound approach using formulas.

Questions To Ask For SKU Optimization

When optimizing SKUs, be sure to take into account the following factors for each product:

• How much demand is there for the product? How often do you run out of stock, and how long does it take to sell an item on average? Does this change with seasons or other factors that would make forecasting difficult.?
• How much physical space does it take up? Does the product or service bring in revenue for that space?
• How much does it cost to buy and store the food? Is this worth making money off of later on?
• Do the products take up space that could be used for other items?
• If you have a profitable product, but with high inventory costs, it may be time to consider other options.
• What is the lead time for this product?
• If customers are not satisfied with the product, will they continue to buy it?

If you are constantly running out of a product, then maybe the problem is that your inventory quantities are too low.

To solve this issue, companies need to adjust their reorder point or economic order quantity (EOQ) to account for increased sales volume when stocking-out occurs.

SKU Productivity Formula

A simple formula can be used to calculate how much an individual SKU contributes towards the store’s sales. This calculation relies on the revenue generated by each item and its respective cost, which allows managers to determine if they are carrying enough of these products in their inventory.

• The first step is to figure out your SKU ratio. List the gross profit of each product, then divide them into ranges like $0-10 or $10-$20.
• To find your SKU ratio, divide the number of items in a range by the total number of products. Multiply that percentage with 100% to get your percent.
• The next step is to calculate the sales ratio. Pick a period, like a year, and add up the number of units sold in each gross profit range. Divide this by total unit sales for that period and multiply it by 100%. This will give you your final figure.
• One good way to find your best products is by looking at the SKU and sales ratios. Products with a high number of SKUs but a low level of performance in terms of their sale ratio are probably not worth focusing on. Your most profitable products will be those that have lower numbers for both measures.

Let’s look at a hypothetical situation to illustrate the formula.

Say you have ten products in the $0-5 range, 20 in the $5-10 range, and 5 in the $10-25 range. You would divide each field by the total (35 products) and multiply by 100. Doing this for each, you’d get SKU ratios of 28.5%, 57.1%, and 14.2%. Over the past year, you’ve sold 260 units in the $0-5 range, 449 in the $5-10 range, and 309 in the $10-25 range. Now, divide the sold units in each field by the total unit sales (1018 units) and multiply by 100. You’d get a sales ratio of 25.5%, 44.1%, and 30.3%. The $0-5 range has an SKU ratio of 28.5% and a sales ratio of 25.5%. The $5-10 range has an SKU ratio of 57.1% and a sales ratio of 44.1%. Last, the $10-25 range has an SKU ratio of 14.2% and a sales ratio of 30.3%.

You have sold 260 units in the $0-5 range, 449 in the $5-10 range, and 309 units total. By dividing those numbers by 1018 (total sales), you get a ratio of 25.5%, 44.1% 30%.

For the three ranges, $0-5 has an SKU ratio of 28.5% and a sales ratio of 25.5%. The following range up is from $6 to 10 with 57.1% in stock and 44.1% sold for sale percentagethirdly there’s a 14.2% amount on hand, but 30%, or one-third, are sold.

I looked at this data, and it led me to the conclusion that:

• If you do not see the results that you want from your $0-5 products, they might be being marketed poorly.
• I would advise you to cut back on marketing activities if your products are less than $5-10.
• The best performing products in my store are $10-25, but they have the fewest SKUs. It would help if you considered adding more of these items to your inventory to boost performance.

If you want to try something more advanced, this SKU analysis guide can help you analyze your SKUs and plot data.

In the beginning, I would track my sales data in Excel spreadsheets. But once it got more complicated with many products and categories, I switched to inventory management software that automatically tracks profitability.

Here are some helpful resources for SKU management.

How To Level Up Your SKU Management 

Spreadsheets help store inventory SKU data and calculate values, but they take a lot of time to set up. If you enter any wrong information into the spreadsheet formula, it can skew your numbers, making incorrect decisions.

Inventory management software is a time-saving tool that automates the calculation of SKU data for new orders. It also helps you keep track of what’s in stock and out.

When choosing an inventory management software, knowing what features are necessary is essential. One feature that I feel should be included in any program worth it’s salt is the ability for users to quickly and easily access information about their profit margins.

• You should consider which software you want to use for inventory management and then find out if it integrates with the other systems that your company uses. I would help if you also ensured that any wholesale partnerships are taken into account.
• I recommend that you ok with software with analytics. You want to see the best and worst sellers and which SKUs are most profitable in different ways.
• The ability to handle SKU data from multiple warehouses is a must for any business, no matter how large or small. It’s also essential to record and allocate costs by SKU at each warehouse.
• Customization is impoessential inventory management software because it can be tailored to your needs. You will also have the option of staying on that program instead of re-platforming and losing all SKU data.

Skubana has integrations with various shipping providers and eCommerce systems so that you can find the right one for your business.

Don’t Let Unprofitable SKUs Bring Down Your Business

Poorly managed inventory can be the downfall of a business. A proper eCommerce store has an efficient, well-organized system that offers you SKU data to make improvements.

To run a productive business, you need to know what’s working and whatnot. Click To Tweet

Tracking profitability at the SKU level is just one way of targeting underperforming products that can significantly increase revenue. Don’t underestimate how much impact your bottom line that reporting at an individual product level has.