Photo by Clay Banks on Unsplash
Don’t even get me started on inventory management. As a retailer, you surely struggle with finding the balance between stocking enough products to meet customers’ demands and making sure that no excessive inventory is taking up precious space.
Sure, understanding customer behavior is crucial but effective inventory management is equally important. Did you know that 43% of small businesses don’t even track their inventory?
To not make the same mistake, this article will explain the importance of sell-through rates and how you can calculate them to improve your inventory management strategy.
Let’s dive in!
Understanding sell-through rates
There’s no better way to see how well your inventory is selling than calculating sell-through rates. So, a sell-through rate is the difference between the amount of inventory that you sold over a specific time out of the amount you started with in the first place.
If you’re interested in knowing how long it takes for your products to generate revenue, and which ones among them are most demanded, calculating the sell-through rates is the best way to go.
Say goodbye to the uncertainty of inventory performance. You’ll finally be able to make informed decisions in terms of stocking, pricing, and promotions.
Benefits of calculating sell-through rates
Have you ever wondered why 90% of startups fail? Between the lack of market tracking and running out of money, they have a hard time finding their way in a competitive market. Whether you’re a startup or an established business, calculating sell-through rates offers you several benefits to help you navigate in a competitive market.
- Improved inventory management. It’s never a good idea to have more inventory than actually needed. It just occupies precious storage that you would otherwise use for more productive purposes.
On the other hand, you should be careful not to be understocked as well. While this is indeed challenging, by calculating the sell-through rates you’ll be able to find the right balance.
- Identify trends. You shouldn’t underestimate the power of market knowledge. Your top-selling products can give you an insight into current market trends and shifts in customers’ preferences. For example, if there’s a sudden demand for tech gadgets, you’ll be able to quickly identify the trend and adjust your products accordingly.
- Enhance customer satisfaction. Remember that a satisfied customer will most likely come back. And by knowing which products are selling well, you’ll ensure they’re available. This won’t only help you meet customers’ demands but enhance their satisfaction and loyalty toward your brand.
- Improve inventory turnover. Your sell-through rates are the key to finding out how fast your products bring revenue. That way, you’ll make data-driven decisions about inventory replenishment and make sure you’re armed with the right amount of stock anytime.
5 ways to calculate your sell-through rates
By now, you understand how huge of a deal your sell-through rates are. When you’re a retailer, there’s always room for improvement, and calculating your sell-through rates brings you one step closer to that improvement. Next, we’ll take a look at the best ways to calculate your sell-through rates.
1 – Simple sell-through rate formula
That’s right. You can check how effectively your inventory is being sold just by using a formula. The simple sell-through formula is actually the fundamental one that’s used by retailers and sales analysts. It shows the percentage of units sold in relation to the number of units received.
Sell-through rate = (Number of units sold / Number of units received) x 100
Let me give you an example. Let’s say that a clothing retailer receives 600 units of a particular t-shirt at the beginning of July. During July the company sold 350 units of that t-shirt. So, to calculate the sell-through rate the retailer will do the following:
Sell-through rate = (350 / 60) x 100
Sell-through rate = 0.5833 x 100
Sell-through rate = 58.33%
Just like that, the retailer finds out that the sell-through rate for that particular t-shirt is 58.33%. This means that during July 58.33% of the units they received were sold. This insight helps the retailer to evaluate their sales performance, as well as make informed decisions to optimize their inventory management.
2 – Sell-through rate based on the value
Let’s expand it a little bit. So, instead of focusing on the units sold, this way of calculating the sell-through rate takes into account the overall value of the sales during that month in relation to the value of the inventory.
Sell-through rate = (Value of sales / Value of inventory) x 100
For example, let’s say the same clothing retailer has an inventory worth $40.000 at the beginning of July and until the end of the month, they manage to generate $15.000 in sales. To calculate the sell-through rates in terms of the overall value they’ll do this:
Sell-through rate = ($15.000 / $40.000) x 100
Sell-through rate = 0.375 x 100
Sell-through rate = 37.5%
This information tells the retailer the sell-through rate for July is 37.5%, meaning that during July they’ve managed to sell 37.5% of the initial inventory value. It gives them insight into how effectively they’re turning their inventory into sales and helps them identify any opportunity for improvement regarding their inventory management strategies.
3 – Sell-through rate by product category
This way of calculating the sell-through rate is a lot beneficial, especially if you have a rich inventory. By analyzing the sell-through rate separately for each product, you can gain insight into which product categories are selling well and which aren’t.
Sell-through rate = (Units sold for product category / initial units available for product category) x 100
Let’s take a look at a real-life example to understand it better. Imagine that our clothing retailer begins the month with 300 units of shirts, 250 units of jeans, and 60 units of accessories.
After analyzing their sales data at the end of the month they find out they’ve sold 90 units of shirts, 150 units of jeans, and 50 units of accessories. Let’s see how they’ll calculate the sell-through rate for each product category:
Sell-through rate for shirts = (90 / 300) x 100 = 30%
Sell-through rate for jeans = (150 / 250) x 100 = 60%
Sell-through rate (accessories) = (50 / 60) = 83.33%
After taking a look at these calculations, the retailer sees that jeans and accessories have a higher sell-through rate compared to shirts. This is an indicator that their jeans and accessories are selling well, while the shirts require a bit of attention.
4 – Lead conversion sell-through rate
If you want to calculate how well you’re doing in terms of converting leads into sales then this is the right way to do so. The following formula provides you with insight into your ecommerce business’s lead generation and sales processes:
Sell-through rate = (Number of sales / Number of leads) x 100
Let’s get back to our clothing retailer. Now, they’ve managed to generate 1,000 leads through social media campaigns and email marketing strategies. Out of these 1,000 leads they’ve converted 150 leads into sales. This is what they’ll do to calculate the lead conversion sell-through rate:
Sell-through rate = (150 / 1000) x 100
Sell-through rate = 0,15 x 100
Sell-through rate = 15%
These calculations indicate that they were able to convert 15% of their leads into clothing sales. If they in any case get weak results, improving the lead conversion sell-through rate will lead to increased customer engagement and higher revenue
5 – Sell-through rate based on customer conversion from impressions
Like every other retailer, you probably also want your marketing efforts to pay off. To see how well they’ve performed you can try calculating the sell-through rate by dividing the number of new customers by the total number of impressions acquired. Let’s take a look at the formula:
Sell-through rate = (Number of new customers / Number of impressions) x 100
Imagine the following scenario where the clothing retailer generates 15.000 impressions across different platforms. This puts them at advantage and brings them 300 new customers who purchase an item from their store. This is how they’ll calculate the sell-through rate:
Sell-through rate = (300 / 15,000) x 100
Sell-through rate = 0,2 x 100
Sell-through rate = 2%
Looking at this, the clothing retailer found out that for every 100 impressions acquired they’ve managed to convert 2 new customers. As mentioned above, this is a great way to see how successful you are in your marketing and advertising efforts.
Improving your sell-through rate calculation
As a retailer, calculating your sell-through rates is a must. The ecommerce industry continuously evolving is also a big indicator that the intense market competition isn’t going anywhere soon.
And it doesn’t have to. You just have to prove you’re the best at what you’re doing and calculating your sell-through rates can help you achieve this. It’s the key to understanding how well your products are doing and how well you’re managing your inventory. Good luck!