What are SKUs and How are They Used in Retail?

By Oleg Mikhailenko
Published in Solutions
April 05, 2022
4 min read
What are SKUs and How are They Used in Retail?

Whether you’ve been in the e-commerce game for a decade plus or whether you’re just getting started on your retail journey, it’s non-negotiable that you have an accurate and efficient way of tracking your inventory. That’s where SKUs (pronounced “skews”) come into play. But what are SKU IDs, and how do you use them? Why are they so important? This article explains everything you need to know about SKU numbers and how they’re applicable to your business.

Put simply, stock keeping unit numbers, or SKUs for short, are numbers that are used to search for, label and track inventory. These SKUs, when analyzed, usually take the form of strings of 8-12 alphanumeric characters and are often designated to products based on various characteristics such as manufacturer, color, style, type, or size. SKUs are created and used across the retail industry (not only in e-commerce) to manage inventory in warehouses and shops and ensure that an accurate count of stock levels is always maintained. This prevents the incidence of phantom or ghost inventory. Rather than phantom inventory being a special kind of product you sell around Halloween, this is a term which refers to the event where products are shown to be available by your point of sale system, but aren’t actually available in your store. This is especially problematic in e-commerce, where a merchant may offer a product through multiple selling channels, and therefore oversell product without realizing. The more products and SKUs representing them that you have, the harder it is to identify and prevent phantom inventory from causing mischief in your operations.

Aside from preventing stocking and supply chain problems, robust SKU systems are a great asset to retailers when it comes to differentiating similar products from one another. Products that have the same design but differ by size, color, or price have separate SKUs, preventing the problem of having the entire class of product being listed as “available” when, in actuality, perhaps only one or two different types are. What’s more, SKUs can be grouped into related categories. This means that if one product is out of stock, your webshop can be set up to automatically redirect a customer towards a similar product that you happen to have available.

Now that you know a little bit about stock keeping units and why they’re useful, let’s define our terms a little further. A SKU isn’t a serial number, nor is it a barcode or a retail business code. Stock keeping unit numbers are only ever used internally, and therefore will differ from store to store. Two different shops carrying the exact same product will have two entirely different numbers representing that product. This can make finding or looking up the correct SKU difficult, since every retail outlet, from Amazon to Walmart to Home Depot, has its own unique system.

A UPC (Universal Product Code, also colloquially known as a barcode) on the other hand, has been standardized for use across all companies by the Global Standards Organization. Two shops selling the same product will have different SKUs representing those products, but both will be categorized by the same UPC. UPCs are universally 12 characters long, all numerals, marking another useful way of differentiating the two.

But how do you create an SKU? Is there some sort of online generator, or do you have to do it all yourself?

It’s absolutely possible to generate everything by hand. However, this can get complicated quickly, especially as you scale your business and add more and more products to your roster. It’s easy to accidentally make mistakes, or discover halfway through assigning your numbers that there’s a better and easier way to do it. You’re then left going back and changing everything that you did before, or alternatively gritting your teeth and going forward with a less efficient system.

If you are going to manually generate and assign SKUs, though, here are some best practices to abide by to make the process as smooth and easy as possible.

First and foremost, any internal identification number should be easy to understand. This means that the most important identifiers should be placed first, so you can know what type of product you’re looking at immediately. Words should be arranged by importance - if you’re a clothing retailer for instance, is it more important to know, at a glance, whether a product is a shirt, red, or an XL? Typically, merchants arrange SKU identifiers by broad categories and then slowly narrow down. This also assists in marketing endeavors, making sure that the correct items are sent for photographing the first time.

Next, you have to make sure that your numbers never begin with zero. This causes issues for processing and fulfillment software and can cause unnecessary delays in updating inventory levels, so it’s best to avoid it entirely. Also, it’s best to avoid ambiguous characters– those letters or numbers that look especially similar to other letters, numbers, or symbols. Anyone who has ever struggled to figure out whether a mysterious ring is a zero or an O can relate to the difficulties this is likely to cause.

Lastly, it’s helpful for legibility reasons to separate identifiers by using dashes or hyphens. Going back to the example of clothing retailers, if you’re selling a red collared shirt in the size XL, the SKU TOP-CS-RED-XL is far more readable than, for instance, TOPCSREDXL would be. Since the purpose of these identifiers are to be useful internally, being readable and identifiable at a glance is more important than it would be for a UPC, which can often simply be scanned and decoded digitally.

Really, though, there are so many cheap and cost effective methods of generating SKUs online that there’s little need to do anything manually. These days, stock keeping units are so universal and integral that they’re a mandatory part of running any online business in the long term. From their utility in keeping inventory straight and assisting in stock forecasting to their ability to redirect customers to similar products in the unfortunate event that something is temporarily unavailable, they’re a repository of useful information that make up an important facet of your inventory management strategy.

There’s no one-size-fits-all approach for generating SKUs for businesses, so the more you tailor your labeling infrastructure to your own specific business needs, the more you can help your e-commerce endeavor succeed. By understanding your market niche, your vendors, and your customers, it’s a snap to craft SKU architecture that allows you to easily scale your business and smash sales goals quarter after quarter. We here at P2Pseller are always happy to help you along the way by providing revolutionary solutions on the free and open economy for e-commerce merchants of all sizes.


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Oleg Mikhailenko

Co-Founder, CEO P2Pseller

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