SKU Numbers Explained: Ultimate Guide for Small Businesses

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.

Depending on the type of inventory, retailers can include identifying information for everything from department to style, gender, size, and color. For example, at my store, we used an SKU system in which the first two letters of each SKU code corresponded to the type of product it was attached to, e.g., all of our shirts had SKUs starting with an SH, all of our pants had PA, jewelry JE, and so forth. The remaining digits corresponded to store location, size, and other relevant product information. With this custom identification system, it was easy to keep track of our products and label our goods.

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. Create a free account today.

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SKU Numbers vs UPCs

If you are buying manufactured goods, each good will come with its own unique universal product code (UPC). If you are manufacturing your own goods, you will need to obtain UPCs for your products. All products should have a UPC present on their label.

While you can use a UPC as your only product code, most retailers will also add a unique SKU code. SKU codes can be customized to make sense with your business and products, so they are a preferable system for internal tracking.

Here are the main differences between an SKU number and a UPC.

Why SKU Numbers Are Important for Store Owners

Whether you are starting a business or already have one up and running, SKU numbers can help you track products in an inventory management system, streamline checkout, boost profits by eliminating human inventory errors, and even 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 & Shopping Experience

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

SKU product codes will help you keep your space organized for your staff and your customers. (Source: International Housewares Association)

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 & 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 are 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, an SKU search in your POS can easily reveal stock status and help staff quickly locate it and close the sale.

With Square POS you can easily scan SKUs at checkout and inventory levels will automatically update with each sale. (Source: The Verge)

Inventory Management & Profits

Shrinkage, or inventory lost to theft and inventory management errors, is costing retailers more and more each year.

While there is also theft to mitigate, many of these losses are caused by administrative and data entry errors that, over time, can add up and seriously impact your bottom line.

Tracking inventory with an 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 5 Steps

Now that you understand why SKU numbers are important, let’s look at a basic five-step framework for creating them. Whether you’re using a manual system or a POS option to track your 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:

Step 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 an 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.

Step 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.

Step 3: Finish SKU With a Sequential Number

Using sequential numbering―like 001, 002, 003―for the final series of an 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 an SKU number to a supplier product number can be helpful too. Again, use whatever makes logical sense for the products you sell.

Step 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

Square’s inventory management features allow you to easily add SKU product codes to your product pages. (Source: Google Help)

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.

Step 5: Create SKU Barcodes Labels

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Once you have added your SKU codes into your inventory system, you will want to create scannable versions of your SKUs, or barcodes, to include on your product labels for easy checkout and inventory counting. Above, you can use our barcode generator to create the scannable codes that you can then download and print. Alternatively, if you are using an automated inventory management software or POS system, barcodes should automatically have been created for each of your entered products. All that is left to do is print and attach your barcodes to your products.

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.

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 that 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 an SKU Number System

• 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 the example 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 an 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. 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.

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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