SKU Numbers: What They Are & How to Set Them Up

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.

Using a POS system automates 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 managing SKU numbers. Visit Square to create a free account.

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SKU Numbers vs UPC Codes

The words SKU numbers and UPCs are sometimes used interchangeably, but they have slightly different meanings. UPCs are set by manufacturers, whereas SKU numbers are created by retailers to fit their individual business tracking needs.

UPCs are 12-digit codes assigned by the Global Standard Organization (GS-1) GS-1 in conjunction with manufacturers who place the codes on products. SKU numbers, by contrast, are an ordered stock numbering system designed to fit your unique business needs.

Why SKU Numbers Are Important for Store Owners

Some retailers use UPCs in place of SKU numbers. However, UPCs can feel random, whereas SKU numbers can be created in a way that makes sense with your business like using letters to identify different departments.

SKUs help you track products in an inventory management system, improve the shopping experience by streamlining checkout, can also help boost profits by eliminating human inventory errors, and providing data to make informed merchandise purchases.

A well-thought-out SKU system helps you better plan and manage three primary areas of your business.

1. Store Appearance & Shopping Experience

SKU numbers help you map and organize your store so shoppers and staff alike can easily find needed products. A SKU number system lets you categorize products in several ways as shown in our SKU Number Examples below. 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.

The SKUs 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.

2. Customer Checkout & Service

A streamlined SKU system makes customer service and checkout tasks 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 reduced for sold items automatically. Plus, when a customer can’t find an item, a quick SKU number lookup in your POS reports stock status and helps staff quickly locate it and close the sale.

3. Inventory Management & 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 administration 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, if you don’t organize your storeroom stock using SKU numbers, it’s easy to lose track of overstock. If you can’t locate your overstock to refill shelves, then you’ll reorder more stock than you need. If you don’t properly check-in inventory shipments, you won’t catch supplier mistakes like shorted shipments. When this happens, you pay for stock that you didn’t receive plus end up with inventory shortages down the line. Both situations equal money lost.

How to Set Up SKU Numbers in 3 Steps

Now that you understand why SKU numbers are important, let’s look at a basic three-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. Use whatever logic works for your organization.

1. Start SKU Numbers With a Top-level Identifier

The first two or three digits/characters of each SKU number 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.

Now that you know how to create SKU numbers, let’s look at some examples of this SKU number framework strategy in action. You can also skip down to How to Use SKU Data and How to Set up SKU Numbers in a POS.

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.

SKU Number Example for a Convenience Store

In the sample above, notice that the first two numbers represent each category of goods in the convenience store. The next four numbers are a sequential numbering system. As long as you don’t have more than 99 departments, or over 9999 products in a given department, this system works and is simple to enter and maintain in any POS system.

However, if you want a SKU number to convey more information about each item, a different system with more identifiers is needed.

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.

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. This is a very handy SKU number system for stores that have item types, like styles or material, that cross multiple categories. This type of SKU system helps staff recognize key details of any product at a glance.

SKU Number Example 3: Include a Supplier Identifier

Sometimes it’s helpful to have supplier information tied to your SKU number. If you display or store products based on brands or suppliers, this 2-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)

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.

Other SKU Number Identifiers to Consider

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 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. 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. This helps track sales by location or outlet, and for tracking inventory quantities per store.

Department Identifier

Departments are broad top-level identifiers that help you track merchandising and store location. 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. This helps 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 track which colors and/or sizes are most popular easily. 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, Boxed Chocolates, and more.

Using the Data—Put SKU Numbers to Work for You

Once products are entered into your POS, you can pull an array of sales, inventory, and reorder reports.

For example:

• 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

Along with SKU-based data, systems with inventory management tools let you organize products further using built-in Category, Manufacturer, and Custom tags. Tracking stock and sales data using both SKU numbers and built-in tags give you the reporting you need to make informed decisions every step of the way.

Setting up a SKU number system is worthwhile if you want to track products and sales data in an organized fashion. However, if you’re asking yourself if SKUs are worth the trouble when your products already arrive with scannable bar codes, here’s the answer before we move on.

Add SKUs to Your POS or Inventory System

The framework we covered above should give you a head-start on creating a SKU number system for your business. 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.

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.

Here’s a look at Square’s product detail page:

As shown above, you can enter as much product data as you wish to track. But you don’t need to spend too much time entering data if you don’t need to track every detail. 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 in a POS system like Square, 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.

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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