One key question when purchasing inventory is: How quickly are the products expected to sell? For growing businesses, from wholesale distributors to retailers, the speed at which inventory is sold is directly tied to cash flow and its ability to scale.
Knowing how fast you can sell your inventory, or your sell-through rate, is critical to managing inventory and optimizing sales performance. As market demand and sales trends change, sell-through rates also serve as early indicators of inventory performance and if a specific type of product is no longer generating the expected profit margins.
This article will cover the basics of sell-through rates, the formula to calculate the current rate, and ways to boost the sell-through for your products.
What is a sell-through rate?
Sell-through rate is the percentage of inventory sold relative to the amount of inventory received from the supplier within a specific time period. Retailers and other product-based companies primarily use the rate to gauge how quickly they can sell products and convert their investment into revenue.
By knowing its sell-through rate, a company can determine whether it’s overstocking or understocking a particular product and take the necessary steps to optimize their inventory management strategy. Sell-through rates can also be used to gauge the effectiveness of pricing and marketing strategies, as well as give valuable insight into a product’s popularity and demand in the market.
How is sell-through rate different from inventory turnover rate?
Sell-through rate and inventory turnover rate are both important metrics used in inventory and sales management. However, they offer different perspectives into a company’s inventory.
A sell-through rate measures the percentage of inventory sold for a given period of time, and helps inform decisions in warehousing, inventory, and sales and marketing.
Inventory turnover rates (or inventory turnover ratios) determine the number of times inventory is sold and replenished during a given time period. Inventory turnover represents the frequency or speed of sales by calculating the time between when a product is purchased and when it’s sold to a customer.
Companies use inventory turnover rates to verify their optimal inventory level relative to sales. A higher inventory turnover rate indicates that products are sold quickly, which minimizes carrying costs, while a low inventory turnover rate signifies slow sales and the likelihood of overstock.
How to calculate your sell-through rate
To calculate sell-through rate, a company needs two key metrics: the total number of units sold in the given period, and the total number of units received in the same period.
Sell-through rates can be calculated monthly, quarterly, or annually, depending on the company’s inventory or sales cycle. The sell-through rate formula is:
Sell-through rate = (Number of units sold / Number of units received) * 100
For instance, say a lighting company receives a shipment of 1,000 units of a new lamp style. In a given month, they were able to sell 650.
Their sell-through rate calculation would look like this:
Sell-through rate = (650/1,000) x 100
This results in a sell-through rate of 65%.
What is a good sell-through rate?
The optimal sell-through rate differs for every industry, season, and individual company. For example, what’s suitable for an ecommerce store that sells back-to-school items may not be good for a retail chain that carries sporting equipment.
Generally speaking, a sell-through rate of 80% is reasonable, while anything under 40% may require revisiting your inventory or marketing strategy. High sell-through rates indicate that products are selling quickly, which may prompt companies to increase their supply reorder quantity or frequency to ensure enough inventory. On the other hand, low sell-through rates are often caused by issues like sales forecasting errors, problems in pricing problems, or inventory overstocking.
To determine a good sell-through rate for your company, consider trends across your industry, market, and business size, if possible. It’s best to benchmark against your own historical sell-through rates, as well, and see if you’re steadily improving.
5 Ways to boost your sell-through rate
Once a company has calculated its sell-through rate, it may discover products that aren’t moving as fast as initially projected. Here are some recommended ways to speed up product sales and boost your sell-through rate:
1. Reduce your inventory levels
If your products are selling, but not as many as expected, you may simply be stocking too much inventory. Rather than purchasing the same amount of stock every cycle, companies should refer to sell-through rates and other metrics before submitting a purchase order. If sell-through rates are steadily declining, it’s best to replace or lessen the order quantity of those particular products. This reduces overstocking and the likelihood of being left with excess inventory, and effectively increases your sell-through rate.
2. Offer discounts and promotions
If sales aren’t moving as fast as inventory is being stocked, offering a promotion may help move products off the shelves. Retailers often see success by offering limited-time discounts, product line markdowns, or bundling slow-moving products with its bestsellers.
While this is one of the most effective ways to accelerate sales, discounts and promotions should be used sparingly. It’s also important to keep the product’s break-even point in mind to ensure the company at least covers costs.
3. Factor in seasonality
While product sell-through rates are calculated for a given period, they don’t account for seasonality. For many companies, however, seasonality plays a key role in how well certain products will sell. For example, the sell-through rate of barbecue grills may not be as high in December as it is in June or July.
Retail businesses usually sell seasonal products a few months in advance and then offer discounts toward the latter part of the season when customer demand wanes. This planned promotion helps improve sell-through rates and creates more space for other more profitable products.
4. Increase product visibility
In some cases, especially for brick-and-mortar companies, products don’t sell because customers don’t see them. Find ways to increase product visibility through merchandising or featured placements on ecommerce sites. Additionally, you can launch marketing campaigns or collaborate with other brands to reach a wider audience and boost your overall brand recognition.
5. Gain insights from data
The first step to maximizing sell-through rates is to identify any existing factors that might be contributing to poor sales. This requires tracking and monitoring real-time metrics using an inventory management tool. Factors such as pricing strategy, product mix, seasonality, and historical sales can provide valuable insights into how a company can improve performance.
You can start making more informed decisions to improve sell-through rates and other key performance indicators (KPIs) by keeping tabs on relevant sales data and how it changes month-over-month.
How QuickBooks Enterprise supports your sell-through rate
Calculating and improving your sell-through rates requires access to reliable data. QuickBooks Enterprise syncs business data into a centralized dashboard to provide line-of-sight into available inventory, upcoming delivery dates, and the status of each order.
Even if your products are spread across multiple warehouses, barcodes and mobile scanners can be used to automatically log and update inventory in a few clicks. By tracking how much inventory is on hand, on sales orders, or on purchase orders, you can instantly see which products need to be restocked to achieve higher sell-through rates.
Bringing your total sales and inventory levels on one platform, QuickBooks Enterprise gives an end-to-end view of your company’s supply chain performance and the ability to calculate sell-through rates in real time via customizable, built-in sales and inventory reporting.
Final thoughts
Sell-through rate is a key metric that can influence decisions across multiple business areas. Not only does it relate to how much cash is currently tied up in inventory, but a sell-through rate also reveals the accuracy of the company’s demand forecasts and how well it sells and markets its products.
A dedicated solution like QuickBooks Enterprise combines all your inventory and sales order data and builds a single source of truth to power your business.
