Understanding Sell-Through Rate

by | May 15, 2024 | Data Management, Order Management, Retailers, Suppliers

Sell-through rate is an essential piece of the supply chain puzzle. Understanding this metric isn’t just about crunching numbers; it’s about wielding a powerful tool to elevate your inventory management process and improve your overall business success. If your shelves are brimming with product, but you lack a clear picture of how quickly that product is flying off those shelves, you’re navigating blindfolded through the retail landscape. Let’s take a closer look at how mastering this metric can unlock a world of efficiency, profitability, and strategic growth.

What is sell-through rate?

Sell-through rate is the percentage of inventory sold during a specific time measured against the amount of stock received from manufacturers or suppliers in the same period.

For example, a sell-through rate of 10 percent indicates that only a small percentage of the stock is sold. In this case, the stock isn’t moving fast enough to turn a significant profit.

Industry-wide, the standard for a robust, lucrative sell-through rate is around 80 percent. The average is typically between 40 and 80 percent. Sell-through rate is a key performance indicator of the strength of a company’s inventory management, and therefore, its profitability.

That’s why it is crucial to understand how to maintain a consistently high sell-through rate.

How to calculate sell-through rate

A solid understanding of a product’s sell-through rate allows businesses to accurately predict how much stock they need and adjust supply accordingly.

Use this simple formula:

Sell-through rate = (number of units sold/number of units received) x 100

To calculate sell-through rate for a specific period:

  1. Determine the total number of units sold in the given period.
  2. Determine the number of units received in the same period.
  3. Divide the number of units sold by the number of units received.
  4. Multiply the figure by 100 to get a percentage.

The sell-through rate reveals key areas to focus on, such as which product quantities need to be increased or decreased based on sales data. This figure also suggests how to achieve a more efficient sales and inventory balance to increase profit and minimize waste.

 

Looking for sell-through data for a specific retailer? Get full visibility into your sell-through performance with SPS Analytics. 

 

What is a good sell-through rate?

Sell-through rates tell you a lot about a company’s success.

Most experts consider a stellar sell-through rate to be anything higher than 80 percent. A high sell-through rate demonstrates that the company has accurately predicted demand.

On the other hand, low sell-through rates may indicate that too much inventory was ordered or that the wrong product was offered to consumers. This suggests the business either lacked the retail data needed or interpreted that data inaccurately, resulting in a poor forecast. These mistakes come with costly effects, such as having cash tied up in goods, needing to make line plan contingencies or markdown plans and paying more for storage to hold excess inventory.

What about a sell-through rate of close to 100 %? While more desirable than having a low rate, this means the business may not be taking advantage of market potential. In this case, there may be a surplus of demand that the existing inventory isn’t meeting, and they are losing potential sales for both themselves and their retailers.

How to increase sell-through rate

There are many reasons a company might experience poor sell-through rates or dramatic month-to-month dips in sales performance. Improper demand planning, a lack of customer and regional understanding, and the absence of real-time data tracking all contribute to underperformance.

To bolster sell-through rates, businesses need to focus on the following strategies.

Tap into the power of data

A recent survey of 150 suppliers found that 75% of respondents considered gaining insight into retailer sales and inventory data would be impactful to their organizations.

To maximize sell-through rates, businesses must first identify the factors contributing to poor sell-through and tackle them individually. This means measuring these factors regularly and making adjustments in real time.

  • Track sell-through rate monthly to spot inconsistencies and trends throughout the year.
  • Focus on seasonal periods and historical trends to spot inventory that can be adjusted year-round. This may mean increasing or decreasing order volumes.
  • Get more granular with data. For example, break down monthly sell-through rates into weekly data. This also allows businesses to react quickly to real-time trends, increase efficiency and limit waste.
  • Track sell-through rates before, during and after promotions. This data provides valuable insights into adjustments that may improve performance.
  • Harness retail data to foster better collaboration between retailers and suppliers.

Get creative with merchandising

Creative merchandising is also helpful in boosting sell-through rates on underselling products. For businesses that focus on high-value items, upselling to new customers and cross-selling to returning customers can lead to higher sell-through rates.

For example, in brick-and-mortar stores, the psychology of store layouts can be the difference between an impressive sell-through rate and excess inventory. So, using data to recommend efficient floor plans and visual merchandising can make all the difference in sales performance. This means using seasonal trends and buying habits to optimize store layouts and promotional strategies.

Run promotions

If sales are stagnant and stock isn’t moving as quickly as it’s coming in, implementing offers or promotions may move the dial. For example, retailers may use some of the following strategies to incentivize sales:

  • Bundle slow-moving products with popular sellers at a slightly marked-up price.
  • Include low-value, high-volume stock as free add-ons as part of a promotion.
  • Amend the price point for products with clear promotions.
  • Run wide-scale sales to promote marked-down products.

Sell-through vs sell-out

Many supply chain terms have similar meanings but may refer to different stages of a product journey.

Sell-in refers specifically to the sales from suppliers to retailers, while sell-out refers to the sale by retailers to end consumers. The term sell-through, however, refers to the whole process: the journey of products from suppliers to retailers and eventually to consumers.

Sell-through and sell-out aren’t mutually exclusive, and sell-out is critical in defining a retailer’s sell-through rate.

To learn more about improving sell-through, check out our best practices to drive sell-through or contact us for a personal consultation.

Joy Spiotta
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