Having old, dead stock in your warehouse ties up your cash in inventory meaning you will struggle to grow your business
What is sell-through rate?
Sell-through rate (STR) is the amount of inventory sold in relation to the amount of inventory you have received, in a given period of time. It is a calculation used to work out which products are selling as well as you’d hope. To enable you to forecast purchasing requirements and to gauge the effectiveness of your inventory management processes.
As an e-commerce fulfillment store, you will use sell-through rates to calculate how quickly a product sells, enabling the stock investment to be converted into revenue. Sell-through rates also indicate the efficiency of the product turnover, helping to avoid unnecessary costs such as long periods of storage and being forced to discount prices to increase sales. Having a good understanding of your sell-through rate is essential to having control over your stock levels.
How to calculate STR
Sell-through rate (as a %) = number of units sold ÷ the number received x 100
To maintain quality inventory, it is normal to calculate sell-through rate across your product range every month. This can be done manually or by using specialized inventory management software.
If you are using software, sell-through rates are shown automatically for each product line. Here is a simple example:
Last month your business received 100 x scented candles
In the same month sales for that product were 75 units
Calculation is therefore: (75 / 100) x 100 = 75%
In this example, the sell-through rate for scented candles last month was 75% - which is a good sell-through rate, indicating that you’re likely to have sold all of that ‘batch’ of scented candles in the first 1 or 2 weeks of this month.
Why sell-through rate is important in inventory management
The longer an item remains in your warehouse meaning sell-through rate is low, the more money it is costing your e-commerce business. On the other hand, if your sell-through rate is high, you may struggle to fulfill orders. It’s easy to forget this, which is why calculating the sell-through rate is so important. Where products have a very low sell-through rate, you should be trying to replace them with alternative items that have a much stronger rate to allow your business to grow as fast as possible.
Having old, dead stock in your warehouse ties up your cash in inventory, which makes your business less flexible. It means that you have less cash at hand to purchase fast-moving stock and less money is available to be allocated to marketing budget - both of which are important levers for growing your business rapids.
In an ideal world, you need to maintain a good balance - matching your inventory with market trends so that you are always in a position to meet customer demands whilst minimising stock held on the shelf.
By calculating the sell-through rate, you have a good idea of how fast inventory is turning over within a set period. By doing this monthly, you are quickly alerted to any changes that need to be made. The goal is to maximize the sell-through rate for every product without ever ‘stocking out’. The higher the rate, the more successful the last purchase of that item was.
While sell-through rates reveal problems with inventory, they do not reveal the cause of the problem. Sometimes a drop-off in sell-through rate may be due to something expected, such as a seasonal trend.
How to improve STR
If your sell-through rate calculations reveal a low figure, it is worth looking at ways to improve it: sell through rate is improved not only by improving sales but by purchasing stock more accurately and holding more appropriate levels of stock. Prioritising these tactics will help you identify products that are slow sellers, while at the same time prepare you to implement trending products. That’s why it is so essential to consistently keep an eye on your inventory data: sell-through rate and turnover rate.
Difference between sell-through rate and turnover rate
It's easy to confuse sell-through rate and turnover rate so let’s look at the differences:
- Sell-through – this shows the percentage of your inventory that you are moving through the warehouse in a month. The higher the number, the better the sell-through rate.
- Turnover rate – this shows the number of times your business sells and replaces stock during a set period i.e. one year.
For most businesses, ‘turnover rate’ is irrelevant on a month-to-month basis, as most businesses aren’t placing multiple purchase orders for the same product in a given month. Typically, this causes far too much admin and the minor gains from purchasing this often in terms of freeing up cash flow are largely negated by the additional time which has to be invested in managing such an operation.
This makes sell-through rate a far better short term analysis tool. It gives a good opportunity to “check the pulse” of the performance of your products. Whereas, turnover rate is used to measure the performance of your inventory management function over a longer period of time. For example, this could be completed annually or each quarter.
The importance of accurate demand forecasting
It’s important to note that stale inventory and weakening sell-through rates aren’t always an indicator of a poorly performing, unprofitable product. They can also be the result of inaccurate demand forecasting.
If you buy too much of a product then your sell through rate will be poor. To keep your cash flow healthy, you need to know the quantity and date to reorder products, based on how long they will take to sell.
Some e-commerce store owners rely on their instincts to do this, which can be disastrous. We’ve seen businesses implementing inventory management tools and discovering their sell through rate for the first time. Only to realize that they are stocking some products which would take over 1000 years to sell through at the current rate of sale! Learn from their mistakes, start now.
Sensible online retailers will study sales reports and sell-through rates, quickly identifying trends and understanding what their customers want. If you’re looking for a simple way to accurately forecast demand for your products based on your previous sales history - it may be worth trialling or booking a demo with Veeqo.
The limitations of sell-through rate
While sell-through rate is important and useful, it cannot be the only tool you use to forecast demand; dictating when you place purchase orders and how much of each product you order. It has several limitations which prevent accurate forecasting.
It cannot, for example, tell you why a product has a poor sell-through rate. The product may not be displayed properly on your website, may be misprice or may have had some poor reviews, etc. All of which can be counteracted to improve your sales rate.
It also does not take into account seasonality, which will obviously impact some businesses/products more than others.
Finally, it doesn’t consider fluctuations in your supplier’s pricing. Occasionally, you’ll get a discount on a large purchase from your supplier of a specific product with a long shelf life. In these scenarios, you may intentionally overstock to take advantage of the low cost price. Opportunities like this would be missed if you exclusively forecasted your purchasing needs based on sell-through rate.
Overall, sell-through rate is a useful metric to track as part of your wider inventory management strategy. Therefore, this should be informing your purchasing decision making.