This article was contributed by our partner Skubana.
If you have a digital storefront, you may not think inventory management is too important. After all, nothing is out on the shelf, so none of your items can become displaced as easily as they can be in a brick-and-mortar location. You have items in your warehouse and you ship them out when sold. Simple, right?
Not so fast. Product rotation, item profitability, and sales velocity are all important measures to audit on a regular basis. If you have stale SKUs that are draining your resources, you need to know so that you can focus on getting them out the door.
Determine which SKUs are Least Profitable
You may think that keeping some underperforming items is acceptable, as long as your business maintains a profit on the whole. This is most definitely not the case. Any leak in revenue, no matter how small, will grow in impact and cause serious damage over time. Not only can an under-selling item cost you money, but it can also divert resources away from items that could be more productive if given the chance.
For instance, are you wasting warehouse storage space on something that takes forever to sell, when you could increase your in-stock capacity for your current bestseller instead? Are you wasting valuable site placement space on a product that sells only rarely?
Once you’ve run the numbers on each SKU, you can better decide whether an item just needs an adjusted strategy, or should be pulled from the catalog altogether. Stop wasting advertising, listing, and warehousing costs on items that barely pull their weight or drag you down.
Run The Numbers
To calculate the profitability of each SKU, you’ll have to compare its production costs against your profits.
- Divide each SKU into a different profitability range by taking the total sale price and subtracting your production costs.
- Set your ranges based on the gross profit margin, such as $0-$5, $5-$10, $10-$15, and so on, and add each SKU to the appropriate range.
- Divide the SKU total in each range by your total inventory of items and multiply by 100%. This gives you the SKU ratio for each profit range.
- Next, choose a period of time to track, such as a year, and find the number of sold units in each profit range. Take that number and divide it by your total items sold, then multiply by 100% to find your sales ratio.
- Compare the SKU and sales ratios for each range. If your SKU ratio is high, and your sales ratio is low, the products in that range are performing badly and need to be re-evaluated.
- Your well-performing products are those with a high sales ratio and a low SKU ratio.
What to Do About Low-Performing Items
Now that you know which SKUs need work, you can build your strategy for either revitalizing or scrapping them. Even if you want to discontinue an item, you’ll still want to clear old stock from your inventory.
This is where you harness the power of your affiliate program. By offering commission bonuses or other incentives to sell particular items, you can refocus energy and keep your losses to a minimum. Some products fall by the wayside or get lost in the shuffle. All they need is a little push to get going again.
On the other hand, don’t push too hard on a product that is truly dead. If your affiliates waste their time pushing something that nobody wants, it can hurt their promotional efforts for more popular products.
That’s why you need to gather as much data as you can about why a particular SKU is lagging behind the rest.
- Is it out of season or outdated?
- Does it just need a little exposure in the way of cart pop-ups or suggested items on your website?
- Would bundling it with other, better-selling items entice customers to buy it?
- Can it be offered as a free gift to those who cross a certain order threshold?
- Is it taking valuable inventory space away from your more profitable items?
Once you answer these questions, you can decide how to proceed. Some products will inevitably need to be cut altogether, but some just need a different approach.
For instance, perhaps your product isn’t coming to the attention of the proper demographic. If you analyze all available data from your website, including page views, you may discover that too many men are viewing your women’s items or vice versa. Perhaps women who buy a lot of quilting supplies are viewing your outdoor camping pages, or cat-owners are ending up in the dog section.
In that case, you only need to make sure the right people find your products. That’s why you have affiliates, after all: they promote to specialized audiences with similar interests.
Retarget your campaigns and galvanize your affiliates in order to breathe new life into flagging SKUs. If that doesn’t work, you’ll most likely want to clearance and discontinue your worst performing items.
Make sure, however, that you don’t alienate loyal customers by suddenly dropping a product with slow turnover. If you sell a truly hard-to-find item that makes you valuable in a niche market, you might also want to keep it in your catalog. If so, give your inventory a truly hard look and reduce what you keep on hand to reflect actual sales rates.
Skubana and Refersion
If you want to really analyze your SKU profitability without painstakingly entering it all into an Excel spreadsheet, you need software built for your needs. Skubana has your back. With integrations that grow as your business does, you never have to worry about exporting your data when you change other aspects of your eCommerce site. Pinpoint underperforming SKUs and craft a strategy to deal with it immediately — without wasting valuable hours crunching numbers.
And once you know which products need a good push, Refersion’s affiliate marketing software enables you to flawlessly implement a strategy to push them out the door. Track sales, commissions, automate payments, and track performance, all from one dashboard.