How to Calculate and Improve the Sell Through Rate in Any Business
A business's inventory management directly reflects how well they are able to liquidize merchandise into cash. Unless a company can efficiently monitor, replenish, and turnover goods, they face the risk of losing profits.
However, with proper inventory tracking methods, management can determine how well each product performs to optimize stock levels and boost sales performance. One important metric that businesses should monitor is the sell-through rate. Without knowledge of the sell-through rate, organizations cannot anticipate customer demand to optimize stock levels.
The sell-through rate is the amount of inventory a business sells in a month versus the amount of stock they've purchased. This measurement shows management how well they are able to sell units. How quickly a company can turnover goods determines if they can avoid excessive storage costs related to sitting inventory. Slow-moving stock can also become obsolete and impact profitability.
By calculating each product's sell-through rate, companies can enhance inventory management to boost turnover and revenue.
How to Calculate the Sell-Through Rate
The sell-through rate is a relatively simple calculation-
Sell-Through Rate = (Number of Units Sold / Number of Units Received) x 100
For example, a store buys 300 packs of pencils in January but only sold 230 packs within the given period. This means they still have 70 remaining units in stock. Their formula would be set up as-
(230 / 300) x 100 = 76.6%
This store has an approximate 77% sell percentage within the time period. While some businesses may require better product performance, this is typically an excellent result. However, an extremely high rate, such as 90%, could mean that the company has understocked a popular item and needs to reassess stock levels. It could also mean the retailer has priced the item too low.
If the sell-through rate was low, the store might have overestimated customer demand and overwhelmed the stock intake. This could require significant mark-downs to sell products and clear storage of slow-moving products.
Inventory Turnover vs. Sell-Through Rate
Although often used interchangeably, inventory turnover and sell-through rates are two separate metrics. The sell-through rate is a percentage that reflects item sales in a month. On the other hand, inventory turnover looks at product performance over an entire year. Therefore, the sell-through rate is a more isolated, short-term metric that is related to the inventory sold.
Many manufacturers will promote product campaigns to boost their sell-through rates at the retail level. Some use what is known as "co-op" - funding that aids retailers to turn over merchandise. These funds are available for advertising efforts and sometimes even capital to reconcile losses experienced from marking down stagnant products.
The time a product spends on a shelf directly impacts its sell-through rate. As time is money, the longer it sits in the warehouse, the more money the business is losing in holding and inventory expenses. The company could also be experiencing lost sales, as this space could be occupied by fast-moving items.
If a business does not act quickly, slow-moving products can become dead stock, affecting inventory turnover. Dead stock is a product that has become completely obsolete and takes up space in the warehouse. This means management cannot order new stock until this space is cleared. Therefore, inventory management must carefully monitor each item's sell-through rate to prevent goods that restrict profits.
How to Improve Sell-Through Rates
Improving sell-through rates generates revenue and enhances a business's profitability. It also reflects how well a company can adjust to and meet fluctuating customer demand. Organizations can boost their sell-through rates by-
1. Launching a Campaign
Retailers can create promotions that reduce the price of slow-moving items to boost sales. However, while this option often attracts consumers, it lowers profit margins. Therefore, discounts should be used moderately to avoid creating a deficit.
For example, if a store still has a few popular seasonal products after the season has ended, launching a promotion can attract sales quickly. However, if these seasonal items were slow-moving during the peak season, it may be the result of overstocking. This requires a complete reassessment of purchase orders and pricing strategies.
2. Reducing Purchase Orders
Management needs to thoroughly research consumer trends and consider historical sales metrics before placing a purchase order. Overstocking a slow-moving product reduces sales, impacting the bottom line. Therefore, if a company recognizes a product losing popularity, they should consider reducing the order size.
3. Using Inventory Management Software
Rather than manually configuring sell-through and inventory turnover rates, companies can implement inventory management software to automate metric calculations. Inventory control solutions take real-time stock quantities to generate reports on sales, profit margins, and turnover rates, enabling management to make data-driven decisions.
Advanced inventory software can integrate with the business's point-of-sale (POS) system to consider products exiting transactions. With POS analytics, management can closely monitor each item's performance to decide whether they need to launch a promotion to boost sales. This also gives a more accurate insight into stock quantities, enabling warehouse management to optimize levels.
By calculating and monitoring inventory's sell-through rate, companies can pinpoint slow-moving stock to prevent a drop in sales and revenue. Through proper stock control, organizations can promote turnover and the bottom line.
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