What Is a SKU Number? How To Use Stock Keeping Units (2024) - Shopify Canada (2024)

SKU numbers (or stock keeping units) help retailers track products within their inventory system. Here’s how to create SKU numbers for your retail business.

A SKU number is used to identify and track products. Retailers rely on SKUs to retrieve purchases from the stockroom, organize merchandise, and sort items by factors such as price, color, and size.

Whether you’re an ecommerce website or brick-and-mortar store—with a massive inventory or limited stock—assigning SKU numbers to products will help you fulfill orders more efficiently.

In this guide, learn what a SKU number is, how to create one, and how to use SKUs to organize your inventory.

What is a SKU number?

An SKU or stock keeping unit is an alphanumeric code retailers use to identify and track a product. Retailers using SKUs will assign a unique code to each item in their inventory.

SKUs tend to be eight to 10 characters long and contain strings of characters that represent different product features, like an item’s price, manufacturer, color, and size.

Unlike other types of product coding, SKUs are created by individual businesses. They may be customized to meet the needs of vendors and customers.

SKU number example

Here’s what a set of SKUs might look like for products sold by a wine retailer:

Using this SKU system, CW21001 identifies the first bottle of Central Winery Chardonnay in the stockroom.

Why use SKUs?

SKU numbers enable accurate and detailed inventory management. Many retailers need SKUs to reduce phantom inventory, prevent stockouts, and predict when to order new products.

If you use a POS, analyzing sales by SKU will reveal which product variants are most and least popular.

Because no two products have the same SKU number, SKUs may be the only systematic way for a retailer to identify a specific item or customer order. For this reason, SKUs are also useful for customer service and support.

How to create SKU numbers

Because stock keeping units are made for internal use, there are no rules you must follow when creating a SKU system (also known as a SKU architecture).

But sticking to a few conventions will help keep your SKUs compatible with external companies and software, should you need to work with a fulfillment partner.

Here’s how to produce your own SKU numbers:

Automate using an IMS or POS

The easiest way to generate SKU numbers is through an inventory management system (IMS) or point of sale system (POS).

These software systems track customer orders and the status of stockroom goods. Most include an automated SKU feature, so each product entered into the system will be assigned a unique SKU.

If you don’t use an IMS or POS for your retail business (you should), there are also online SKU generator apps and websites, such as this free SKU generator tool by Zoho.

Create SKUs by hand

If you’re a retail store with a small product catalog and turnover, you may be able to create SKUs by hand and on an as-needed basis.

To do this, you’ll need a codified system for identifying the major features of your products.

• The first part of a SKU represents the broadest product feature, such as the product category or supplier.
• The following SKU characters represent increasingly specific product features, such as color, size, or brand.
• The final SKU character(s) is a sequence identifier, showing the amount of products you have and the order in which they were purchased or processed.

Where possible, create codes with visual meaning, such as the first few letters of a supplier or brand name. This will make your SKUs easier to recognize and process manually.

Also, stay within 10 characters to keep your SKU numbers compatible with third-party software if you decide to transition to a digital tool in the future.

Use your SKUs to define popular product features

Help your sales team by using SKU numbers to highlight popular product features. For example, if you’re a clothing retailer, you might notice that certain colors, sizes, or styles sell better than others. By using SKU numbers to track these attributes, you can better understand your customers’ preferences and adjust your inventory accordingly.

“Most of the time customers don’t buy products; they buy a bundle of attributes,” says retail operations expert Marshall Fisher. “Think about the last time you bought a TV. Did you say, ‘I want TV X’? Or did you think about screen size, resolution, and brand?”

Tracking these attributes with SKUs ensures you’re stocking the right mix of products to meet customer demand.

Never use zeros or special characters

Zeros can be skipped by some retail software or mistaken by employees for the letter O, causing confusion when inputting SKUs.

Similarly, special characters such as !, @, or & can cause issues with certain software systems and should be avoided in SKU codes.

4 ways to use SKUs in your retail business

The major retail functions of a stock keeping unit include:

1. Calculating reorder points
2. Forecasting sales
3. Planning product displays
4. Upselling and cross-selling

1. Calculating reorder points

Using SKU data, you can monitor product statuses and calculate reorder points—the date or time when you need to order replacement stock. This is typically when your inventory level drops to a predetermined number. By tracking how quickly each SKU sells over a given period, you can predict when you should place another order with your supplier.

💡 The Stocky app by Shopify automatically calculates reorder points based on supplier lead times, so you won’t run out of your most popular SKUs.

2. Forecasting demand and sales

Using a SKU system also means more accurate sales and demand forecasting. Run your SKU data through an ecommerce analytics tool and you can answer questions like:

• How much staff do I need on the shop floor during a specific season?
• How much inventory should I have ready for weekends?
• How much payroll can my cash flow cover in different seasons?

If your SKU data highlights low-selling items, you can monitor sales and reduce inventory accordingly. That way, you can continue to meet customer demand without losing money on dead stock.

3. Planning product displays

A well-produced SKU architecture highlights a store’s most and least popular items. Another way to harness this information is to create product displays and make visual merchandising decisions based on SKU data.

For example, you could place high-selling SKU items at eye level on your store shelves, or feature them prominently on your website’s homepage.

4. Upselling and cross-selling

SKU product data can also be applied on the sales floor or within an ecommerce checkout.

For instance, SKUs enable cross-selling and product recommendations. If a customer is purchasing a laptop, SKU data can suggest compatible items like a laptop bag or wireless mouse, enhancing the customer’s shopping experience and increasing your sales.

If a product is out of stock, SKUs make it simple for retail staff or an ecommerce store to recommend alternative similar products.

SKU management

Effective SKU management involves creating, tracking, and updating SKUs, as well as using SKU data to make informed business decisions. Here are four aspects of SKU management to consider:

1. Consistent SKU creation

Ensure that your SKUs are created consistently across all your products. This means using a similar structure and format for all SKUs, which will make them easier to understand and manage.

2. Regular SKU updates

As your product offerings change, so should your SKUs. This could mean updating SKUs when you introduce new product features or discontinue certain products.

3. SKU tracking

Track your SKUs to monitor sales trends and inventory levels. This can provide valuable insights into which products are selling well and which ones aren’t, helping you make informed inventory management decisions.

4. Using SKU data

Use SKU data to make business decisions. For example, you could use SKU sales data to determine which products to promote or discount, or use SKU inventory data to calculate reorder points and avoid stockouts.

Common mistakes to avoid with SKU numbers

When dealing with SKU numbers, there are several common mistakes that retailers often make. Avoiding these mistakes can help ensure that your SKU system is effective and accurate.

• Overcomplicating SKUs: Keep your codes simple and understandable.
• Inconsistent structure: Use the same SKU structure across your products and sales channels.
• Not updating SKUs: Regularly audit SKUs to reflect product changes.
• Ignoring SKU performance: Review SKU sales data to identify trends.
• Using manufacturer’s SKUs: Customize your SKUs to support your specific business needs.
• Using special characters or zeros: These can cause confusion and software compatibility issues.
• Lack of SKU hierarchy: Implement a logical hierarchy in your SKUs for easy organization.
• Not training staff: Make sure your team understands how to use and manage SKUs.
• Not linking SKUs to UPCs: This can help streamline inventory management and sales processes.

SKU vs. UPC

SKU numbers aren’t the only type of product codes used by retail stores. UPCs or universal product codes are another widespread form of product identification.

SKUs and UPCs look similar and are used simultaneously by retailers. But their functions are slightly different.

Here’s a helpful breakdown of the differences between SKUs and UPCs:

A stock keeping unit identifies a unique product and its traits, while a universal product code represents a product’s manufacturer (the first six numbers) and its item number (the next five characters). UPC codes also contain a check digit (the last number). This is a security/validity mechanism.

SKU vs. barcode

A barcode is the batch of black lines found on product labels or packaging, which retailers scan when completing a customer’s purchase. The term barcode is often used interchangeably with UPC because most barcodes encode a UPC number.

Unlike SKU numbers, when retail stores generate a barcode, they don’t create a new UPC. Barcodes are assigned to all like products regardless of where they are sold. However, retailers may print product labels containing both a barcode and their SKU number.

Getting started with SKU numbers

The more you tailor your SKU architecture, the more you can harness it to meet your customers’ needs.

By understanding what product features are important to you, your vendors, and your customers, you can craft a SKU architecture that allows you to efficiently manage your inventory and scale your business.