What is a SKU?

SKU stands for "Stock Keeping Unit." It is a unique identifier assigned to a specific product or item in inventory. SKUs are used to track and manage individual products, making it easier to identify and differentiate items within the inventory. 

It’s a product information system made up of an alphanumeric code, a series of numbers and alphabets, that represents a unique product.

The item number isn’t the same as the SKU. In an SKU the different components of a product find their unique signatures and all of them combine to form the SKU.

A big advantage that SKU offers is it minimizes the risk of error by adding a unique identification be it a manufacturer of products or retailer. Another advantage that it brings to the table is that SKU numbers are specific to variants, be it something small like a different color. This ensures that you have a good grasp of your inventory management and every single thing’s accounted for. 

Another technique that’s commonly used to categorize products is with the use of barcodes and serial numbers which serve purposes of accounting and stacking but don’t offer several advantages solely unique to SKUs. Let’s see what those are and how SKUs streamline picking and stacking products.

Let’s see how they work.

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How do SKUs work?

For instance, let’s say you retail dog collars. Now you have manufactured two of them that are the same in every aspect except color— one being grey and the other one red.

So let’s assign SKU1 for product A and SKU2 for product B.

Imagine introducing one more variance. Dog collars for small-sized dogs which are comparatively smaller than the original one.

So there’s the original product SKU1 and the shorter one SKU3. Now the shorter one also comes in color variations— the original in grey and the variant in red. Let’s call the red one SKU4.

In total there are 4 product variations and 4 SKUs.

Here’s an example.


What are SKUs beneficial for?

They’re worth countless hours saved in frustration.

With these unique ID numbers you’re able to tag your products.

That helps in determining which products are quickly moving off shelves. That way you can crank up on production for fast-moving products or order higher numbers depending on sales volume.

Thus, SKUs present a granulized picture of your online store.

This additionally helps crunch revenue numbers by making it easy to see which item sells how many numbers. Some benefits of SKUs include:

  • Improved inventory control and tracking
  • Differentiation between various product variants
  • Improved data accuracy and reliable inventory system records
  • Streamlined order fulfillment processes
  • Improved demand forecasting and sales analysis
  • Warehouse management optimization
  • Simplified for ecommerce business management
  • Management of suppliers and fulfillment centers

SKUs help sell more products

Stores across the US have begun reducing the unique SKUS they carry for similar products from different manufacturers.

Essentially they’re limiting choice.

That has a positive impact on sales. Since too much choice often kills conversions.

As counter-intuitive as it may seem, limiting the number of choices clears customers’ heads and helps them think straight.

A few scientific studies have highlighted the fact that less is more.

I’ll explain with examples.

Walmart took a bold step in reducing the average number of store displays by 15%. Grocery chain Tesco too followed in the same footsteps culling down inventory by 30%. Glidden, a renowned paint maker, tamed its color palette from 1000 to 282. When Proctor & Gamble reduced the number of shampoos by 50% they witnessed increased sales of 10%.

Back in 2014, the average supermarket carried over 40000 products; a 500% increase compared to supermarkets in 1975.

Clearly, overstocking hasn’t worked. SKUs help determine the movers and shakers, helping make tough decisions easy.

Customers might be able to find products sooner with SKUs

Customers might copy the SKU and run a Google search to determine the cheapest product on sale.

Millennials today are a lot smarter and do much comparison shopping. Copy-pasting SKUs is a crowd-favorite when it comes to pushing the buy button.

You don’t have any SKU—you miss valuable real estate. A chance to be in-front of purchase-happy customers who are at the verge of swiping their credit cards.


You don’t want to be on the list of have-beens.

Here’s an example where I search the SKU number shared above. Look at the results I get.


Reduce shrinkage with SKUs

Another reason to use SKUs is to help identify shrinkage.

A retail store orders and stacks thousands of products from different manufacturers. As such it’s essential to implement a strategy that takes into account the actual number of products coming in.

A few might be lost in transport and some others due to theft.

SKU numbers make it easy to identify the number of variants and units ordered for each. So if SKU1 has 10000 units and you get only 9500 you should be able to attribute that to theft and report them as missing.

Concluding thoughts

The obvious tradeoff seems that you need to offer an unlimited number of SKUs. This can be detrimental to long-term success and ups the ante on several costs including warehousing and stocking.

But it isn’t necessary to do that.

You can very well offer a limited range of products based on sales data. The ultimate goal of providing variations isn’t to provide it for its sake but to help get granular data.

Customers don’t need a water purifier in 20 different color variations.

The end goal is purified water which can be achieved with any color.

SKUs lend more than one benefit— they present the bigger picture, help customers do comparison shopping, give you more search engine real estate online and help sell more. What’s not to like about them?


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SKU inventory management FAQs

What are the best practices for SKU inventory management?

Here are some key SKU management best practices for ecommerce businesses:

  • Keep SKU codes unique and descriptive of a specific product to avoid confusion.
  • Regularly review and update SKUs to reflect changes in product types and variations.
  • Implement barcode or RFID technology to streamline inventory tracking.
  • Utilize inventory management systems to automate SKU tracking and analysis.
  • Monitor sales data and adjust inventory levels based on demand trends.
What are the challenges in SKU inventory management?

The SKU management process can present various challenges for businesses. Some of the common challenges include:

  • Data entry errors leading to duplicate or inaccurate SKUs.
  • Managing large SKU volumes can be complex and time-consuming.
  • Balancing stock levels to meet demand while avoiding overstock situations.
  • Difficulty in tracking and forecasting products with varying attributes or product bundles.
  • Human errors like data entry errors, mislabeling and misplacement as they track inventory.
Can SKU inventory management be automated?

Yes, SKU inventory management can be automated using inventory management software or ERP systems. These SKU systems can track different SKUs, update inventory levels in real-time, and provide insights into sales performance, enabling businesses to make data-driven decisions.

From the shopping cart to delivery, Extensiv makes order fulfillment seamless and easy. Total visibility. Total control.