The goal of the majority of businesses is to profitably sell the inventory they purchase.
How effective is your company at that?
You’d be shocked at how many companies don’t know. To boost sales and track the products sold, they focus heavily on inventory costing techniques at the point of sale, but they pay no attention to how quickly the inventory moves through their system. They pay no attention to the sell-through calculation and disregard their average sell-through rate.
A high sell-through rate indicates that you are ordering the proper quantity of stock to meet demand. And you’re guiding that inventory through the pipeline without incident.
However, a low sell through indicates that you ordered too much inventory. Or not enough people want to pay your price to purchase your stock. Your inventory forecasting, demand planning, purchasing, or pricing strategy is fundamentally flawed in either case.
Let’s examine the definition of the sell-through rate and the rationale for why it’s crucial to comprehend the sell-through formula when it comes to cross-selling and other issues. You’ll soon be familiar with everything you need to know to get started, from how to calculate sell-through to how to improve sell-through rate.
- What is sell-through rate?
- The importance of your sell-through rate
- What is the formula for sell-through rate?
- What is a Good Sell-Through Rate?
- How to Improve Sell-Through Rates
What is sell-through rate?
A sell-through rate (STR) is the ratio of inventory received from your manufacturer(s) during the same time period to inventory sold within the month (or another time period).
Your STR is a performance metric that compares monthly sales to a predetermined goal. You can track sales, change your goals, and maintain an effective supply chain by measuring your STR.
The ideal sell-through rate (STR) is at or above 80%, although this varies from industry to industry.
The importance of your sell-through rate
Your sell-through rate is crucial for a number of factors.
Identify products that are in and out of favor
Your STR is more than just a general indicator of total sales. Retailers frequently determine their STR based on the supplier, product line, store location, and other factors.
As a result, your STR is a useful tool for assisting in your understanding of the most popular products. Utilizing this data will enable inventory optimization and a more accurate assessment of customer demand.
Reduce storage expenses
Low sell-through reveals inaccurate forecasting of your inventory and possibly unnecessary storage. To learn more about how you can reduce your storage costs, use your STR.
Stock that quickly expires or is out of season makes overstocking expensive. A space that could be used to store goods that your customers will purchase is also taken up by unsold inventory.
Taking into account storage costs versus anticipated shipping costs or profit loss from stock outs, both of which have increased significantly during the pandemic, is one way to decide if stocking more heavily is the right move for you.
Improve supply chains
Unexpected delays can occur in supply chains, especially during the COVID-19 pandemic. Manufacturers, vendors, retailers, and customers are all attempting to compensate for supply line bottlenecks.
Many retailers make up the difference by placing excessive orders, or overstocking, before they know which products will actually be profitable. Your STR provides you with clarity on sales trends, so you can work with your suppliers to place advance orders for the right products and stock up on hot sellers.
Each retailer has sales objectives. Setting goals enables you to monitor performance, hold sales representatives responsible, and inspire your group.
You can increase sales by the supplier, product line, store location, sales channel, and more with the aid of your STR. With STR, you can examine sales from any angle and learn more about the performance of different facets of your retail operation.
Controlling your cash flow
Another tool for comparing your revenue to the cost of your inventory is your STR.
If your STR is dropping over time, you are likely spending more money than you are bringing in. As you adjust your inventory orders and storage costs, a growing STR, on the other hand, indicates that your profit margin is increasing and will keep doing so.
What is the formula for sell-through rate?
Simply divide the total number of units of a product sold throughout the month by the quantity of stock you had of that product at the beginning of the month to determine the STR of that product. The percentage is then calculated by multiplying the result by 100. By searching for “sell-through rate calculator” on Google, you can find online resources to help you quickly calculate sell-through.
Consider the scenario where you purchase 75 candles to sell in your store. You sell 55 of them in the first month. For a STR of approximately 73%, you would divide 55 by 75 and multiply the result by 100.
Sell through rate formula
For calculating your sell-through rate, use the following formula:
Sell Through rate Formula = (Number of Units Sold/Number of Units Received)*100
To calculate the percentage, divide the amount of stock you received by the amount of inventory you sold and multiply the result by 100.
Example sell-through rate
Your company received 100 scented candles last month.
Sales of that item in that same month totaled 75 units.
Therefore, the calculation is (75/100) x 100 = 75%.
This indicates that you likely sold the entire “batch” of scented candles in the first week or two of this month. Scented candles had a sell-through rate of 75% last month, which is a respectable figure.
What is a Good Sell-Through Rate?
When it comes to the sell-through rate, there is no magic number.
The kind of product you sell, your target market, and your business model will all influence the best STR for your company.
For instance, you might be able to get away with a lower sell-through rate if you deal in high-end items with a long shelf life (like designer handbags).
On the other hand, you’ll need to maintain a higher STR if you sell quick-moving items with a limited shelf life (like consumables) to prevent tying up too much cash flow in inventory.
Tracking your sell-through rate over time and contrasting it with your sales and profitability is the best way to figure out what STR is best for your company.
Consider raising your prices or discontinuing specific products if you notice that your sell-through rate is consistently less than 10% and there isn’t a corresponding rise in sales or profits.
On the other hand, you might want to think about lowering your prices or broadening your product mix if you have a high sell-through rate but aren’t making the profits you want.
The bottom line is that a variety of factors will influence the appropriate sell-through rate for your company. Tracking your sell-through rate over time and modifying your strategy as necessary is the best way to figure out what is best for you.
How to Improve Sell-Through Rates
You have determined that your sell-through is low after computing it. Here are some strategies for expanding your company that were inspired by experts to improve sell-through rates.
Planning to introduce a Campaign
To increase sales, retailers can run special offers that lower the cost of slow-moving merchandise. Although this choice frequently draws customers, the profit margins are reduced. Therefore, it is best to use discounts sparingly to prevent running up a deficit.
If a store, for instance, still has a few in-demand seasonal items after the season has passed, running a promotion can quickly boost sales. However, if sales of these seasonal items were slow during the busiest time of year, it might be because of overstocking. This necessitates a thorough reevaluation of purchase orders and pricing schemes.
Software for Inventory Management
Inventory management software can be used by businesses to automate metric calculations such as sell-through and inventory turnover rates rather than manually configuring them. Management can make data-driven decisions thanks to inventory control solutions, which use real-time stock quantities to produce reports on sales, profit margins, and turnover rates.
The point-of-sale (POS) system of the company can be integrated with advanced inventory software to take into account product exit transactions. Management can carefully assess each item’s performance using POS analytics to determine whether a promotion is necessary to increase sales. Additionally, it provides a more precise understanding of the stock levels, allowing warehouse management to optimize levels.
Cutbacks on Purchase Orders
Before placing a purchase order, management must thoroughly investigate consumer trends and take into account previous sales metrics. When a product is overstocked, sales drop, which affects the business’s bottom line. Therefore, a business should think about lowering the order size if it notices that a product is losing popularity.
Sell-through is a crucial metric that you shouldn’t ignore. The best option is to use a POS and inventory management system that can easily track your sell-through rate to measure it frequently using the formula above. And once you have the information, make sure to use it! Your inventory, marketing, and merchandising decisions should be based on your sell-through rate. Then, iterate as necessary.