What is a Stock Keeping Unit (SKU) and How to Create SKUs

Ever wondered what those mysterious product codes mean when you're managing inventory? A SKU (Stock Keeping Unit) is your secret weapon for tracking every unique item in your business. It's a distinct set of 8-10 numbers and letters that helps you identify products, including their variations like size, colour, and style. 

If your small business is growing, it’s a great time to think about optimising your inventory management with these alphanumeric codes.

Here, we’ll define SKU, and demonstrate how a well-designed SKU system can help your business.

In this article, you’ll learn:

• What does SKU stand for?
• What is a Stock Keeping Unit (SKU)?
• What is the difference between a SKU and UPC?
• What is the difference between a SKU and a barcode?
• How to create SKUs
• Examples of SKUs
• Best practices to optimise SKU setup

• What are the benefits of SKUs?
• Tracking SKUs with inventory management software

What Does SKU Stand For? 

If you’re wondering ‘what is SKU?’, this acronym stands for Stock Keeping Unit. It’s also sometimes known as a product code – not to be confused with a barcode. A barcode is scanned to get product information, while an SKU is a unique code that businesses use to track their stock.

What is a Stock Keeping Unit (SKU)?

A Stock Keeping Unit (SKU) is a unique alphanumeric code that businesses use to identify and organise products. Each SKU is 8-10 characters long and acts like an abbreviation of the product details. It captures key details like a product's features, price, and manufacturer. 

Every variation of a product should have its own unique SKU.

Why Do Stock Keeping Units Matter?

Designing a well-organised inventory with Stock Keeping Units means that you can::

• Track stock levels accurately
• Identify popular products quickly
• Streamline your stocktake process
• Manage multiple product variations efficiently
• Make smarter ordering decisions

For QuickBooks users, SKUs are particularly powerful when integrated with your accounting software, helping you maintain precise inventory control and making tax time less stressful.

What’s the Difference Between SKU and UPC?

It’s easy to confuse Stock Keeping Units (SKUs) and universal product codes (UPCs), but they serve different purposes. A UPC is a numeric-based, universal 12-digit code that’s assigned to a product, and remains the same regardless of where the product is sold.

While SKUs are created by the business selling them, UPCs are issued by GS1 (formerly Uniform Product Code Council) to ensure standardisation and compliance and are mandatory for most products sold in retail stores.

What’s the Difference Between SKUs and Barcodes?

Think of a barcode as your product's passport – it's a universal identifier that works anywhere in the world. These come in two main forms:

• UPC (Universal Product Code): A 12-digit number used primarily in North America
• EAN (European Article Number)/IAN (International Article Number): A 13-digit code used globally

Unlike SKUs, which you create for your own business, barcodes must be purchased from authorised providers. This ensures no two products worldwide share the same barcode. 

If you're planning to sell internationally, you'll need to check which barcode system each country requires. Most retailers can guide you on whether you need a UPC or EAN for their market.

Here are some key differences:

• SKUs are internal: You create these for your business's use
• Barcodes are universal: They're standardised globally and must be purchased
• Flexibility: You can link an SKU to a barcode, but it's not required
• Control: You control your SKUs; governing bodies control barcodes

Many Australian businesses use both systems: SKUs for internal inventory management and barcodes for retail sales. This gives you the best of both worlds – detailed internal tracking and seamless point-of-sale operations.

How to create SKUs

You can easily create your own unique stock-keeping units using the Quickbooks free SKU Generator or you can use product variants to create SKUs manually.

It’s a good idea to create a list of the variants that describe and distinguish your products from each other such as:

• Type
• Brand
• Colour
• Size
• Gender
• Stock location
• Origin
• Purchase date

How To Use Variants in SKUs

You can track different product options by adding variants to a single SKU. Variants help distinguish products based on attributes like size, colour, or style.

Let’s say you’re selling red boots for women in size 6. You might create an SKU ‘RED-BTS-W-06’ using the following variants:

• Colour: RED (for red)
• Type: BTS (for boots)
• Gender: W (women)
• Size: 06 (shoe size six)

You can repeat this process to create unique SKUs for product variants.

Good example of a Stock Keeping Unit (SKU)

A well-designed SKU tells you everything you need to know about a product at a glance.

A good SKU should be:

• Consistent in format
• Easy to read and type
• Logical to sort
• Free from special characters
• Descriptive but concise

Let's look at how SKUs work in practice using the example SKU from above (RED-BTS-W-06):

• The first three letters (BLU/BLK/GRN) indicate the colour
• 'BTS-W' shows it's a women's boot
• The final numbers (07/08/09) represent the size

This systematic approach means that even with hundreds of products, you can instantly identify any item in your inventory. While your customers might never see these codes, they're invaluable for your business operations and a successful stocktake.

Bad SKUs: What Not To Do

Let's look at some problematic SKU examples that could create headaches for your business:

• Women's blue boots, size 7 = WOMENSBOOTSBLUENICECOMFORTABLESIZE7
• Red boots = Boot1
• Black boots = BOOT2!!

Here’s why these SKUs fail:

1. The first SKU is far too long and complicated. It’s hard to read at a glance, difficult to remember, and easy to mistype when searching.

1. The second SKU ("Boot1") is problematic because it doesn't specify important details like size or colour, provides no way to group similar items, and will become messy when you add more boots (Boot2, Boot3, etc.)

1. The third SKU ("BOOT2!!") introduces special characters, which can cause issues in inventory software and may not be supported by all systems

Instead of these confusing examples, stick to clear, structured formats like "GRN-BTS-W-07" that we saw in the good examples above.

Best practices to optimise SKU setup

Setting up SKUs is easy, but it’s a good idea to follow a few rules to maximise their use. Here, we’ll explore how to make the most of your SKU system while avoiding common pitfalls.

Make SKUs Unique But Understandable

The Stock Keeping Unit numbers and letters that make up a SKU should represent important product information. Use a combination of abbreviated letters and numbers to signify product variants. Keep it short: between 8 and 12 characters.

Don’t overcomplicate your system by loading the numbers with a meaning because this will become a confusing string of numbers. If it’s too complicated you’ll need to have a legend on hand to decode the meaning of every SKU for each specific product.

For example, when creating an SKU for a blue dress in a size small from your Autumn/Winter 2021 collection, isn’t ‘AW21DrBS’ easier to understand than ‘15020101’?

In this example (SKU ‘AW21DrBS’), the breakdown is:

• AW = Autumn/Winter
• 21 = 2021 (year)
• Dr = Dress
• B = Blue
• S = Small

Arrange Attributes According to Importance

Think about how you would describe your product in the order of its defining characteristics. Choosing to begin with the season or year will help you limit your searches to the right collection, followed by increasingly broader characteristics like product type, colour, and size. 

Let’s look at a good SKU (SS25-RUN-BLK-M-09) for a running shoe: 

Breaking this down:

• SS25 = Spring/Summer 2025 (Season/Year)
• RUN = Running Shoe (Product Category)
• BLK = Black (Colour)
• M = Men's (Gender)
• 09 = Size 9 (Size)

To make your SKUs readable and consistent, try to maintain the same format across all of your products. This will make reordering and stocktake easier. 

Avoid Spaces, Accents, Symbols, and Letters That Look Like Numbers

Using accents, symbols or letters that look like numbers can confuse your inventory system, so stick to alphanumeric SKUs as much as possible.

Here are some examples of symbols to avoid:

• Avoid using the letter ‘O’ because it can be easily mistaken for a 0.
• If you’re using Excel for inventory management, using a slash like this “/” could result in your SKU being interpreted as a date.
• Symbols like ‘>’, ‘*’, ‘^’ can create confusion among inventory systems and staff.

Benefits of SKUs

Here's what a well-designed Stock Keeping Unit system offers:

• Better Stock Control: With an effective SKU system, you can track variants, monitor levels, and identify items instantly
• Smarter Planning: Forecast trends and predict inventory needs accurately

• Improved Accuracy: Reduce errors and speed up order fulfilment

• Enhanced Efficiency: Simplify stocktakes and streamline warehouse operations

Common SKU Challenges

Even the best Stock Keeping Unit (SKU) systems face hurdles. Here are some of the challenges businesses typically encounter:

• Inconsistent formats and accidental duplications
• System migration and supplier change issues
• Picking errors and tracking difficulties
• Growing pains when scaling the business
• Software integration problems
• QuickBooks Online helps businesses overcome these challenges by offering robust inventory management features to simplify integration with other systems. QuickBooks also provides tools that generate consistent SKU tracking.

Tracking SKUs With Inventory Management Software

Using inventory management software is an efficient way to record, manage and keep track of SKUs. QuickBooks Online inventory management software allows you to enter inventory information and seamlessly sync your SKUs, invoices, inventory, products, purchase orders and supplier information – all in one place.

Join a free 30-day trial to see how QuickBooks can simplify your inventory management.