The point of most businesses is to profitably sell the inventory they buy.
How good is your business at that?
You’d be surprised that a lot of businesses don’t know. They dive deep into inventory costing methods but don’t pay attention to how efficiently the inventory moves through their system.
A high sell through means you're ordering the right amount of inventory for that inventory’s demand. And you’re smoothly guiding that inventory through the pipeline.
But a low sell through means you’re ordering too much inventory. Or not enough folks want to buy your inventory at the price you’ve set. Either way, there’s something fundamentally wrong about your demand forecasting, purchasing strategy, or pricing strategy.
Let’s look into exactly what sell through rate is and why it’s important.
What Is Sell Through?
Sell-through rate is a percentage that shows how much of the inventory you received was sold—over a set period of time.
What Does Sell Through Mean for Your Business?
But the great part about sell through is that it doesn’t just measure inventory as a whole. It can also be used for inventory from specific manufacturers or product lines. Businesses are then able to understand which types of products from which suppliers are the best investment.
Also, like inventory turnover, it’s a good way to qualify how efficiently your supply chain runs. If your inventory pipeline is running smooth, sell through rate reflects that. Low sell through means there are likely opportunities around optimizing inventory carrying costs and pricing strategies.
How to Calculate Sell Through Rate
Companies calculate sell through rate by dividing the number of units sold by the number of units received. Then multiplying the result by 100.
Sell Through Formula
Sell through rate = (Number of Units Sold / Number of Units Received) x 100
Let’s walk through a sell through calculation to get the hang of it.
Sell Through Calculation
Imagine BlueCart Coffee Company, a coffee roasting company we just made up right now.
Let’s say BlueCart Coffee Company buys 300 pounds of green, unroasted coffee beans on January 1st. Throughout the month of January they roast and pack it all, selling 180 pounds of it. On January 31st, they have 120 pounds of roasted, packed coffee left.
Sell through rate = (180 / 300) x 100
Sell through rate = .6 x 100
Sell through rate = 60%
BlueCart coffee sold 60% of the inventory they received throughout the month of January.
Alternately, you can use a sell through rate calculator. Sell through rate calculators are often included in automated inventory management software. It’s a fairly simple calculation, but doing it for every product can be time consuming. Especially for companies with a wide range of products.
What Is a Good Sell Through Rate?
It varies by industry and organization, but the general rule is that a sell through rate above 80% is ideal.
What’s an Average Sell Through Rate?
An average sell through rate usually falls between 40% and 80%.
Here’s a telling chart of retail sell through rates from Accelerated Analytics, a retail POS data reporting and analysis firm:
As can be seen, sell through rate also increases over time. That’s why a “good” sell through rate is variable.
Some products have or need a lower days sales in inventory (DSI). They have to be sold fast, and they have less time to sit on the shelf and wait for a buyer. That puts them at a disadvantage from a sell through perspective. But, from a carrying cost perspective, waiting around for non-perishable items to sell can damage profits.
So, your sell through rate is low. What to do?
How to Increase Sell Through Rate
A high sell through rate means a company sold the inventory it received quickly. Doing so without discounting the merchandise is the best way to keep profits high.
On the other hand, low sell through indicates that products aren’t moving fast. That ties up cash in storage, risks sitting inventory becoming inventory shrinkage or obsolete dead stock, and often necessitates a discount. All of which eat into profits.
Here’s how to increase sell through rate:
- Lower your average inventory. Your demand forecasting could be off. There may simply not be the demand you think there is. Adjust to that and order less. That bulk shipping discount may not be helping. Tighten the reins on your inventory operation and manage it as the data shows it presently is. Not as you hope it will be.
- Discount your finished goods inventory. You can control demand for your product, in a sense. By lowering the price you change the calculus of every potential buyer. That can mean conversion. Of course, profit goes down compared to maximum markup. But it’s better than dead stock sitting around.
Low sell through rate is just a matter of adjusting either supply or demand. In that sense, it’s pretty simple.
Sell Through Vs. Inventory Turnover
Sell through is the amount of inventory that moves through your possession throughout a given period of time. Inventory turnover ratio is the speed at which inventory moves through your possession throughout a given period of time.
They both have to do with cycle inventory, but the key difference is the “given period of time.” Sell through rate is a simpler calculation that doesn’t require COGS and is, therefore, use often for shorter time periods. Inventory turnover rate is typically used for annual numbers and larger-scale, end-period accounting.
Sell On Through to the Other Side
Sell through is equally important to vendors and retailers. Anywhere you are in the supply chain, your sell through rate provides a glimpse into how well your purchasing and sales strategies fit together. It is a vital inventory KPI for a profitable business.
Aim for a high sell through rate. Products that sit on the shelf are a financial risk that keep cash tied up. Calculate sell through for different products or categories. Use that information with seasonal demand forecasting to inform your inventory management techniques.
And, finally, use a platform like BlueCart to streamline ordering and fulfillment. That makes optimizing sell through rate easy. Get in touch and we’ll show you how.