SKU Meaning: Stock-Keeping Unit and How to Use One

SKUs are essential for managing inventory. Most POS systems come with tools to generate and track these codes.
Dalia Ramirez
By Dalia Ramirez 
Edited by Sally Lauckner

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A stock-keeping unit, or SKU, is a scannable, unique alphanumeric code a retailer generates and assigns to an individual product. SKUs help businesses optimize inventory management, and make tracking more efficient. These numbers, letters and dashes are added to products as scannable barcodes.

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How are SKU numbers used?

SKUs provide information about the characteristics of a product, such as its color, style, brand, type, size, price and more. Unlike universal product codes, or UPCs, SKUs are unique to each business and can be tailored to represent the most important aspects of its products.

Retailers use SKUs to track what’s selling, which helps them know when to restock from vendors. SKUs also allow retailers to track their inventory down to the individual item, providing a clear and consistent internal organization system so business owners know exactly what they have in stock.

SKU example

A blue men’s Patagonia vest in size medium could have the following SKU: PAT-M-BLU-MED-13, representing the important features (Patagonia, men’s, blue, medium) and ending with the sequential number of the item (which one it is within the same type, e.g., the 13th vest in stock).

Why are SKU numbers helpful?

Here are a three business functions that SKUs can improve:

1. Inventory tracking

To run a business efficiently, it’s important to know what you have available to sell.

SKUs make it much easier to determine what you have in stock, and therefore to identify when products need to be reordered and avoid stock-outs, especially if there are supply-chain disruptions.

SKUs give you better control over your inventory, providing a consistent system to sort and find orders from customers and vendors alike. Using them ensures that inventory never sits forgotten in a warehouse and that customers don’t go months waiting for their favorite product to be restocked.

2. Customer experience

For brick-and-mortar stores, SKUs can help decide how to arrange product displays to feature best-selling items, group similar units together and spotlight excess inventory to make room for new products. Online businesses can benefit from algorithms that use SKUs to suggest similar items and automatically mark products as “last few” or sold out.

3. Sales forecasting

Businesses looking to optimize their profits can use point-of-sale, or POS, systems to collect data on sales through product SKUs. When each product is individually labeled, you can create reports and predict future growth, allowing you to plan ahead for restocking and investing in certain product lines. SKUs can help identify less popular items and dependably sought-after products to keep in stock.

How to create a SKU

Most retail point-of-sale systems have some kind of inventory management infrastructure that can create and manage SKUs, though some have better SKU-specific features than others. Here are a few to check out:

  • Square: Auto-generates SKUs when you add new items and can automatically create unique SKUs in bulk for item variations.

  • Shopify: Comes with SKU management tools, but no built-in generator, so you’ll need to manually enter product codes.

  • Toast: Can assign SKUs to menu items, with an optional feature to set up and scan embedded barcodes with SKU numbers and/or UPCs.

If you don’t have a POS system yet, there are free online generators that create unique SKUs. There’s no built-in inventory management if you go that route, however.

Best practices for generating SKUs

To ensure your SKUs are as useful and accurate as possible, here are five pointers business owners should keep in mind.

1. Keep SKUs short and focused

The letters and numbers in a SKU should provide information about a product’s most important features, such as brand, color, size, model or flavor — not general information like product category or store location.

SKUs can be any length, but they’re typically between eight and 12 characters. This length reflects the necessary information about a product without additional bulk. Also, most inventory management systems are built to read SKUs within this range, so longer codes may cause delays or malfunctions. Check your POS system for its recommended range.

2. Don’t use spaces or special characters

Dashes separate the numbers and letters in a SKU, so spaces aren't necessary. Also, avoid using punctuation or special characters, as humans and POS software may not read them correctly.

3. Don’t use letters that look like numbers

SKUs contain both numbers and letters, so humans and POS systems might confuse “O” and “I” with zero and one at first glance. SKUs should also never start with a zero, as computers can interpret it as nothing and turn a SKU like “01589241” into “1589241.” The best practice is to begin a SKU with a letter, which is easier to identify and denotes the most important item characteristic.

4. Order information from general to specific

Most products can be identified with three or four key features. List them in order in the SKU, starting with general identifiers, such as brand, and ending with the sequential number. The sequential number denotes the specific item at hand (for example, the fourth type of ceramic bowl in stock versus the fifth).

It’s important to keep the format consistent, so that, for example, a pair of men’s light-wash blue jeans in size 32 can be easily and quickly differentiated from the same pair in a size 34.

5. Keep inventory size and type in mind

Part of what makes SKUs so useful for small businesses is that they can be tailored to the size of your stock and the most common defining characteristics of your products. Note what characteristics customers ask you about most often: Are they looking for a specific brand? A certain material, color or size? This information can help you make your SKUs as useful as possible.

The contents of your inventory can also guide you to the best SKU format for your business. Stock with less variety may only require smaller-scale identifiers, but larger online stores may benefit from organizing by department and brand before further breakdown.

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