SKU Numbers for Small Business: The Ultimate Guide

A stock keeping unit (SKU) is an alphanumeric code that identifies a product and helps you track inventory for your retail business. You can create SKU numbers manually or using inventory management or point-of-sale (POS) software. SKU numbers print on your product label along with the product’s universal product code (UPC) and other product information.

If you need help managing SKU numbers, a POS system can make it easier to track SKUs and automate the inventory tracking process, saving businesses time and money. Square offers a free retail POS with features for bulk uploading inventory lists, spotting sales trends, and—last but not least—managing SKUs. Visit Square to create a free account.

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What Is a SKU Number?

A SKU number is a unique combination of numbers that retailers use to identify their inventory. Because SKU numbers can include both letters and numbers, there’s a tremendous amount of flexibility, making it easy to create a system that’s totally tailored to your business needs. Depending on the type of inventory, retailers can include identifying information for everything from department to style, gender, size, and color.

SKU Numbers vs UPC Codes

The words SKU number and UPC—or universal product code—are sometimes used interchangeably. However, they have slightly different meanings and UPCs may be less intuitive for retailers to use. For example, UPCs often seem random, whereas SKU numbers can be created in a way that makes sense with your business—like using letters to identify different departments.

Here are the main differences between a SKU number and a UPC code:

Why SKU Numbers Are Important for Store Owners

SKU numbers can help businesses track products in an inventory management system, improve the shopping experience by streamlining checkout, and help boost profits by eliminating human inventory errors. A SKU number can also provide the data necessary to make informed merchandise purchases.

A well-thought-out SKU number system helps you better plan and manage several primary areas of your business:

Store Appearance and Shopping Experience

SKU numbers help you map and organize your store so shoppers and staff can easily find products. You can track products by item type, department, collection, or vendor so that you can organize and find products easily on your sales floor and in storage areas.

SKUs also improve store merchandising and present an inviting, ordered experience to shoppers, which leads to more sales. Without SKU numbers, you can lose track of where products are in your space and end up with confused staff, frustrated shoppers, and worst of all, lost sales.

Customer Checkout and Service

A streamlined SKU system makes customer service and checkout smooth and error-free. Tracking products using SKU numbers in a POS system, like Square for Retail, ensures that your inventory and pricing is always spot on.

When customers check out, purchases ring up with the correct pricing, and your on-hand quantity is automatically reduced to reflect sold items. Plus, when a customer can’t find an item, a SKU search in your POS can easily reveal stock status and help staff quickly locate it and close the sale.

Inventory Management and Profits

Inventory management errors are the third major cause of profit losses in most retail businesses, just behind shoplifting and employee theft. These losses are caused by any number of administrative and data entry errors that, over time, can add up and seriously impact your bottom line. Tracking inventory with a SKU number system prevents many of these lost profit situations. For example, SKU numbers enable you to:

• Organize your storeroom and keep track of overstock for future orders
• Check-in and manage inventory shipments to avoid shorted shipments
• Use your supplier code to pull inventory counts for just one supplier for an inventory spot-check
• Pull a sales report based on one item type code such as Flare-leg to see all sales for Flare-leg products over a period of time
• Pull a restock order report for one department within one store

How to Set up SKU Numbers in 4 Steps

Now that you understand why SKU numbers are important, let’s look at a basic four-step framework for creating them. Whether you’re using a manual system or POS to track inventory, the framework is the same. You can mix numbers and letters in your SKU numbers system using whatever logic works for your organization. Follow these steps to create a system that meets the unique needs of your business:

1. Start SKU Numbers With a Top-Level Identifier

The first two or three digits/characters of each SKU should represent a top-level identifier. This can be a department, store category, or even a supplier. With this, a glance at a SKU number identifies the top-level merchandising group and location of any product in your store. You can also use this section to identify store locations if you run more than one store.

2. Use the Middle Numbers to Assign Unique Identifiers

It’s helpful to use the middle section of SKU numbers to assign unique features such as size, color, item type, or subcategory, to your product―whatever makes sense when organizing the products you sell.

3. Finish SKU With a Sequential Number

Using sequential numbering―like 001, 002, 003―for the final series of a SKU number makes setup easy and also helps you identify older versus newer items in a product line. In some cases, tying the final series of a SKU number to a supplier product number can be helpful too. Again, use whatever makes logical sense for the products you sell.

4. Add SKUs to Your POS or Inventory Management System

You can create your SKUs and track inventory by hand in notebooks or by using spreadsheets, but it is far easier and more efficient to use a retail POS with inventory tracking. In general, a POS like Square lets you enter as much—or as little—product data as you want to track. That said, most small stores generally need to enter just the following to get started:

• Item name
• Item category
• Product description
• Type of item
• Pricing
• SKU number
• Any applicable variations like different sizes or colors

With this data in place, you can manage your sales and track inventory easily in one streamlined system. Plus, every transaction automatically updates your inventory so that you always know what you have on hand for every SKU number in your system.

One of our recommended POS for small and growing businesses is Square. The basic POS is free to use, and the Retail POS is $60 per month and includes advanced inventory management features and comprehensive reports. You can add more features as you grow too.

SKU Number Examples

Now that you know how to create SKU numbers, let’s look at some additional examples of this SKU number framework strategy in action.

SKU Number Example 1: Simple Top-Level Identifier

Here’s a simple numeric SKU number system that uses just one top-level identifier in a six-digit SKU to manage inventory at a convenience store. Notice that the first two numbers represent each category of goods at the store. The next four numbers are a sequential numbering system. As long as you don’t have more than 99 departments, or over 9,999 products in a given department, this system works and is simple to enter and maintain in any POS system.

SKU Number Example for a Convenience Store

If you want a SKU number to convey more information about each item, a different system with more identifiers is needed, as in the example below.

SKU Number Example 2: Versatile 2-Identifier System

Here’s an eight-digit SKU number system that uses two identifiers to represent a top-level category plus an item type for each product. This type of SKU system helps staff recognize key details of any product at a glance. For that reason, it’s a very handy SKU number system for stores like fashion boutiques, that have item types—like styles or materials—that cross multiple categories.

SKU Number Example for a Fashion Boutique

In this sample, the first two numbers represent the top-level category for this fashion boutique for items like Jeans, Blouses, and Dress Pants. Then, the next two numbers identify different item types like Straight-leg, Flare-leg, Sleeveless, Short-sleeve, and so on. The last four numbers are sequential.

Note: With this system, your item types don’t have to be category-specific. For example:

01120000 = Jeans (01), Flare-leg (12)
09120000 = Dress Pants (09), Flare-leg (12)

Here, Flare-leg (12) applies to more than one category since it’s a style common in both Jeans and Dress Pants.

SKU Number Example 3: Include a Supplier Identifier

Sometimes it’s helpful to have supplier information tied to your SKU number. This is an especially helpful SKU number system in fulfillment warehouses where goods are stocked and tracked by the supplier rather than merchandised in a mix as in a retail store. If you display or store products based on brands or suppliers, this two-identifier, 10-digit SKU number system can cover all the bases.

SKU Number Example for an Ecommerce Business

In this type of alphanumeric SKU number system, staff can determine the supplier and item type of any product SKU number they encounter easily. Plus, being alphanumeric, it’s easy for new and seasonal staff to understand and remember. As in Example #2, this system uses item types that cross multiple suppliers, for example:

BP063-0001 = Bentley Plastics (BP), Large Tumbler (063)
TT063-0001 = Tervis Tumbler (TT), Large Tumbler (063)

Other SKU Number Identifiers to Consider

In the examples above, we explored how common top-level identifiers such as category and supplier can pair with item type codes to create versatile SKU number systems. However, those are just a few of the many identifiers you can use. Here are some other identifiers that may be useful for your operation.

Store or Location Identifier

If you run more than one store or sell some items solely online or via fairs or markets, you can also use a Store Identifier to group items by sales outlet. This helps track sales by location or outlet, and makes it easier to track inventory quantities per store. Even if you don’t sell in multiple locations yet, if you think that’s in your future, leave a placeholder for this identifier in your SKU framework so you won’t have to reinvent your system later.

Department Identifier

Departments are broad top-level identifiers that help you track merchandising and location within your store. You can use a Department Identifier to quickly tell where an item will be located or displayed on the sales floor. If you use a department identifier in your SKU number, you can also segment sales reports by department to spot troubled areas of your store. If you have a department with overall lackluster sales, you might need to move that section, adjust your store’s traffic flow, or boost your featured displays in that area.

Variation Identifier

If you sell products that come in different colors or sizes, a Variation Identifier can be a great help to both your customers and staff on the sales floor. Plus, it lets you easily track which colors and/or sizes are most popular. Here’s a look at how easy it is to add a variation identifier to our sample SKUs:

01120001M = Jeans (01), Flare-leg (12), Medium (M)
09120001L = Dress Pants (09), Flare-leg (12), Large (L)

Subcategory Identifier

For small retailers, this level can be a bit fussy, But if you wish to track inventory and sales at a very granular level, you can add a Subcategory Identifier to your SKU. For example, if you have a Candy category, you can assign a numerical code for subcategories such as Candy Bars, Lollipops, and Boxed Chocolates.

Tips for Creating a SKU Number System

When creating a SKU number system for your business, consider these tips and tricks:

Keep it simple. SKU numbers are so easy to customize for your business that it can be tempting to include too much information. Avoid incredibly long SKUs by choosing two to three traits that you want to reflect in your SKU number system. And, if you want more than three traits, keep the individual codes brief.

Start with the most important trait. Once you identify these high-priority traits, decide which is most important to you and put it at the beginning of each SKU number. Some retailers prefer to use the most general trait as the first identifier and then work down from there—for example, start with the identifier for jeans before getting into style and size.

Don’t start SKU numbers with a zero. Oftentimes, computer software interprets a zero at the beginning of a number as just that—nothing. This means that the SKU 01120001M could actually be read as 1120001M. To avoid confusion caused by this type of error, don’t start any of your SKU numbers with a zero. Many businesses get around this by adding a brand or supplier identifier at the beginning of the SKU number such as in example #3 above.

Avoid letters that may be confused for numbers. Because SKU numbers are alphanumeric, it can be tempting to take advantage of all of the letters of the alphabet. That said, you should avoid using letters that look like numbers to avoid confusion. For example, the letter “O” may be easily confused with a zero and a capital “I” looks a lot like a one.

Don’t just reuse the manufacturer numbers. Developing a SKU number system can seem intimidating, and it may seem easier to just use the manufacturer’s number or include it in the SKU. However, this eliminates the benefits of having a custom SKU formula built to meet the unique needs of your company.

Bottom Line

SKU numbers help you organize, track, find, and identify inventory using a system that’s meaningful to you and your staff. Done right, your SKU numbers help you merchandise your sales floor, better serve customers, and maximize sales. Essentially, having a thoughtful and well-maintained inventory management system can make your business more efficient and more profitable.

Pairing a meaningful SKU number system with a POS like Square gives you every tool you need to maintain your inventory and sales floor efficiently. Square provides streamlined, user-friendly inventory management and reporting tools so retailers can put SKU numbers and their data to work. Visit Square to create a free account.

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