Stock-Keeping Unit (SKU) Meaning and How to Use It

SKUs are essential for managing inventory. Most POS systems come with tools to generate and track these codes.
Jun 22, 2022

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

How are SKU numbers used?

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

Retailers can also use SKUs to track sales and calculate data on which products sell, allowing businesses to restock from vendors and provide information to customers. SKUs allow retailers to keep track of 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.

What’s in a SKU number?

A SKU number can include whatever information a retailer wants it to include. For 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).

Each SKU should be unique. This ensures that each product in your inventory can be accounted for separately and that there are no mix-ups about quantities. Your SKUs should clearly differ from the manufacturer’s so that you don’t confuse the two codes when running inventory.

Why are SKU numbers helpful?

SKUs may not seem to have much meaning for your business when you're just starting out. But that assumption is the “most common mistake,” warns Ken Colwell, author of “Starting a Business QuickStart Guide.” He used to use an Excel spreadsheet to track sales in the early days of his own business, but “you get to a point pretty quickly where that’s not manageable anymore and you need a more sophisticated method,” he says.

Here are a few business functions that SKUs are useful and even essential for:

1. Inventory tracking

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

“Small businesses need to use SKUs,” says Colwell, who is also the dean of the business school at the University of Houston-Victoria in Texas. 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 in this time of supply chain disruptions,” he notes. “Entrepreneurs have ideas of which would be better — too much inventory to ensure availability or stock-outs to create high demand — but it’s best to try to get it as close as possible" to the amount of product needed.

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. Improved customer experience

For brick-and-mortar stores, SKUs can help you rearrange 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 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. With SKUs, you can easily eliminate less popular items and dependably keep sought-after products in stock.

SKU vs. UPC meaning

SKUs are commonly confused with universal product codes, or UPCs. Products are often tagged with both codes, but knowing the difference between them is essential for accurate inventory management.

The main difference is that SKUs are business-specific and only used internally, while UPCs are, as their name indicates, universal. A UPC is a 12-digit code generated by the product manufacturer — not the retailer — with oversight from the GS1 US, a nonprofit organization responsible for upholding global business standards.

Essentially, SKUs identify important internal product traits and are specific to your business. UPCs are, again, universal, and are used to identify the item throughout the supply chain.

How do you generate and implement SKUs in a small business?

SKU setup may seem daunting at first, but today’s retail POS systems make the process much easier. Almost every POS system has some kind of inventory management infrastructure, 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 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.

  • Clover: Integrates with the Easy Labels app to print barcodes with SKUs and/or UPCs.

If you don’t have a POS system, you can use a free online generator like those from Primaseller or QuickBooks Commerce (formerly TradeGecko) to create unique SKUs. There’s no built-in inventory management with this method, however.

Best practices for generating SKUs

To ensure your SKUs are as useful and accurate as possible, here are several best-practice methods for business owners to keep in mind.

Keep SKUs short and focused

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

While SKUs can be any length, they’re typically between eight and 12 characters. This length should allow you to represent all of 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, though; for example, Shopify suggests SKUs under 16 characters and notes that some products are simple enough for a four-to-eight-character SKU.

Don’t use spaces or special characters

Because dashes are used to separate the numbers and letters in a SKU, spaces aren't necessary and can be deleted when the SKU is input into a management system. Additional special characters should also be avoided, as humans and POS software alike may not read them correctly.

Don’t use letters that can be mistaken for numbers

Because SKUs contain both numbers and letters, there’s a possibility for confusion with letters like “O” and “I”, which can look like the numbers 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 for SKUs is to begin with a letter, which is easier to identify and denote the most important category the item falls into.

Order information from general to specific

Most products can be identified with three or four key features. These should be listed in order starting with the more general identifiers, such as brand, and ending with the sequential number. The number at the end denotes the specific item at hand (the fourth ceramic bowl in stock vs. 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.

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 aspects customers ask about most often: Are they looking for a specific brand you carry? A certain material, color or size? These observations can help you arrange SKUs to be as useful as possible for you, vendors and customers.

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, while larger online stores can benefit from organizing by department and brand before further breakdown.