The point of most businesses is to sell the inventory they buy profitably.
How good is your business at that?
You’d be surprised that many businesses don’t know. They dive deep into inventory costing methods from the point of sale to increase sales and measure products sold, but ignore how efficiently the inventory moves through their system. They ignore their average sell through rate, with no mind paid to the sell through calculation.
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 stock at your price. Either way, there’s something fundamentally wrong with your forecasting demand planning, purchasing, or pricing strategy.
Let’s look into exactly what sell through rate is and why it’s important to understand the sell through formula, when it comes to how to cross sell and everything else. From how to calculate sell through to how to increase sell through rate, soon you'll know everything you need to get started.
What Is Sell Through Rate?
The sell through rate (STR) is a key performance indicator (KPI) that measures the percentage of inventory sold in a given period. The sell through rate is an important metric to measure because it indicates whether a company is overstocking or understocking its products in relation to customer demand.
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. You can also use it for inventory from specific manufacturers or product lines. Businesses can then understand which types of products from which suppliers are the best investment.
Low sell through means there are likely opportunities around optimizing inventory carrying cost and pricing strategies. If your pipeline inventory is running smooth, sell through rate reflects that. Also, like inventory turnover, it’s a good way to qualify how efficiently your supply chain runs.
How to Calculate Sell Through Rate
Companies calculate sell through rates by dividing the number of units sold by the number of units received, then multiplying the result by 100 to get the percentage.
This metric is essential for future demand forecasting and helps companies understand how quickly their inventory sells. They also use sell-through rates to calculate the fill rate. A high sell through rate indicates that products are selling fast and may need to be replenished soon, while a low sell through rate indicates that products are not selling as quickly and there may be excess inventory.
To get an accurate picture of STR, tracking both units sold and units received over time is important. This will help you see trends in sales and adapt your forecasting accordingly.
When calculating sell through rates, it is also vital to consider returns and cancellations. You should remove a product from the units sold calculation if it is returned or canceled. This will give you a more accurate picture of how quickly products sell and help you avoid overstocking.
What Is the Sell Through Formula?
STR = (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. BlueCart Coffee Company buys 300 pounds of green, unroasted coffee beans on January 1st.
Throughout January, they roast and pack it all, selling 180 pounds of it. On January 31st, they have 120 pounds of roasted, packed coffee left.
STR = (180 / 300) x 100
STR = .6 x 100
STR = 60%
Why Measure Sell Through Rate?
If you're an eCommerce retailer, one of your eCommerce KPIs is sell through rate. This metric tells you how fast your inventory sells and is a crucial indicator of overall profitability. There are three reasons why you should measure sell through rate:
- It identifies potential problems with your inventory levels. If your abc inventory analysis indicates a low sell-through rate, it could mean that you have too much inventory on hand. This can lead to markdowns and other problems that can affect your profits.
- Measuring sell through rates helps you optimize your stocking levels. If you know how fast your inventory is selling, you can adjust your ordering accordingly to ensure that you have the right amount of stock. This can help you avoid the cost of carrying too much inventory, which can eat into your profits.
- Measuring sell through rates can help you understand your customer behavior. If you see that certain items are selling quickly, you can adjust your marketing and pricing accordingly to maximize profits. Conversely, if you see that certain things are not selling well, you can investigate why and make changes to improve sales.
Overall, measuring the sell through rate is vital to effective inventory management. By understanding this metric, you can make informed decisions about your inventory levels, stocking strategy, and pricing that can increase your profits.
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. This means that for every 100 products that are available for sale, at least 80 of them are sold. If your sell through rate is lower than this, it may indicate that you need to adjust your pricing or promotions. Several factors can affect sell through rates, so it's important to track this metric regularly and make changes as needed.
What Is the Average Sell Through Rate?
The 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 you can see, sell through rate also increases over time. That’s why a “good” sell through rate is variable.
Some products have or need lower inventory days (DSI). They have to be sold fast and 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 STR means a company quickly sells the inventory received. 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 warehousing and risks sitting inventory becoming inventory shrinkage or dead stock and often necessitates a discount. All of which eat into profits.
Here’s how to increase your STR:
- Lower your average inventory. Your demand planning and forecasting could be off. There may not be the demand you think there is. Adjust to it 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.
- 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 more conversions. Of course, profit goes down compared to maximum markup. But it’s better than dead stock sitting around.
A low STR 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. The Inventory turnover ratio is the speed at which inventory moves through your possession throughout a given time.
Inventory turnover rate is typically used for annual numbers and larger-scale, end-period accounting. They both have to do with cycle inventory, but the key difference is the “given period of time.” The STR is a more straightforward calculation that doesn’t require cost of goods sold (COGS) and is, therefore, used often for shorter time periods.
Frequently Asked Questions About Sell Through Rate
The STR is integral to inventory organization and successful demand management. Take a look at these commonly asked questions and our answers to understand them even better:
How Do You Calculate Sell Through Rate In Excel?
STR can be calculated with the following Excel formula: Number of units sold / Beginning of month inventory (i.e., units on hand) x 100 = STR.
STR = 1,764 units sold / 2,178 units sold x 100 = 80.99%
What Is Sell-In and Sell-Out?
Sell-in is any sale from a manufacturer to a wholesaler or distributor; sell-out is any sale from a retailer or business to a consumer. This language describes how materials and products make their way into and out of various markets.
Selling in is the process of bringing raw materials inventory or supplies to businesses that manufacture products or distribute them. Selling out is the process of B2C (see B2C meaning) businesses and retail stores selling goods to consumers-perhaps through social media marketing, which is the final stage of the supply chain.
What Are the Limitations of Sell Through Rate?
Here are a few limitations to keep in mind when using STR as a performance metric:
- STR only measures sales at the SKU. It doesn't consider other important factors such as margins, customer satisfaction, or overall profitability.
- STR can be affected by changes in inventory levels. For example, if a retailer buys more inventory than they sell, their STR will decrease even if they don't have any problems selling the product.
- STR doesn't always reflect actual demand. For example, if a product is heavily discounted or there's a buy one get one free promotion, the STR will be artificially inflated.
- STR can be misleading when comparing across different time periods. For instance, STR will naturally be higher during holiday seasons when people buy gifts for loved ones.
Sell On Through to the Other Side
Sell through is equally important to vendors and retailers. It is a vital inventory KPI for a profitable business. Anywhere you are in the supply chain, your sell through rate shows how well your purchasing and sales strategies fit together.
Aim for a high sell-through rate. Products that sit on the shelf are a financial risk that keeps 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 an online marketplace like BlueCart to streamline ordering and fulfillment. That makes optimizing the sell through rate easy. Get in touch with us today, and we’ll show you how.