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SKU Numbers: What Are They and How to Set Them Up

Matthew Speiser

Staff Writer at Fundera
Matthew is a staff writer at Fundera. He has written extensively about ecommerce, marketing and sales, and payroll and HR solutions, but is particularly knowledgeable about merchant services. Matthew's writing has been published in Business Insider, The Fiscal Times, Best Company, and NJ.com, among others. Matthew was also a co-author for Startup Guide—a series of guidebooks designed to assist entrepreneurs in different cities around the world. He has a degree in journalism from the University of Delaware. Email: matthew.speiser@fundera.com.
Editorial Note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone.

If you visit just about any retail business and look at the price tag on a product, you’re likely to find something called a stock keeping unit number, or SKU number for short. The SKU number is a custom numeric or alphanumeric code that helps businesses track inventory. It is usually located on a price tag or price sticker. 

For customers, SKU numbers are easily overlooked and often ignored. But for retail business owners, SKU numbers are key to making sure inventory is managed efficiently and sales are maximized. So in this guide, we’re going to break down SKU numbers in order to help you set up a SKU number system for your business. We’ll cover what SKU numbers are, why they’re important, how to set them up, and additional tips and advice.

Let’s get started.

What Is a SKU Number?

As previously mentioned, SKU numbers are numeric or alphanumeric codes that help businesses track inventory. Most businesses have a SKU number system that is unique to them. Generally speaking, SKU numbers are about eight to 12 characters long, with each character corresponding to a unique characteristic of the product it represents, such as the item type, brand, style, or department the product belongs to.

For example, a clothing store might create an eight-digit SKU number with the first two digits representing the product category (such as t-shirts or jeans), the next two digits representing the style (such as slim fit or regular fit), then two digits representing the product color (such as “RE” for red or “BL” for blue), and the last two digits representing the stock count of that particular item (01, 02, 03, 04, etc.—depending on how many of that specific item is in stock). Note that different businesses will track different things with their SKU codes, because every business has different products.

SKU numbers can be used by both brick-and-mortar retail merchants as well as ecommerce sellers to say up to date on inventory and track sales. 

sku numbers

SKU Numbers vs. UPC Numbers

One point of confusion with SKU numbers is that they often get conflated with Universal Product Codes—or UPC for short. This is an easy enough mistake to make, as both are typically located on a product’s price tag. However, it’s important that you and your staff know the difference. Not knowing the difference between SKUs and UPCs could lead to big mistakes with your inventory management.

A UPC is a 12-digit code assigned by the Global Standard Organization, a not-for-profit organization that develops and maintains global standards for business communication. The Global Standard Organization, known as GS1, works with retailers and manufacturers to assign and oversee product UPCs, as well as barcodes. 

UPCs are placed on products by the manufacturer. This is in contrast to SKU numbers, which are determined by the retailer. UPC numbers are also a random assortment of numbers, whereas all the characters in a SKU number are purposefully chosen. With a UPC, you can look up helpful information such as the manufacturer suggested retail price (MSRP). You can also use UPCs to research products online. 

Some small business owners even use UPC numbers in lieu of SKU numbers. However, this takes away many of the advantages of having a system tailored specifically to your business’s needs.

sku numbers

Importance of SKU Numbers

Now that you know what SKU numbers are (as well as what they aren’t), let’s learn about why they matter. Here are the benefits an organized SKU number system provides:

Improved Shopping Experience

Accurately tracking SKU numbers allows you to organize your store in such a way that both customers and staff can easily find products. This is because SKU numbers can represent a variety of different characteristics about the product. Once staff learn your business’s SKU number system, they will be able to know exactly where a product belongs in your store simply by looking at the SKU number. 

This, in turn, makes it easier for customers to find exactly what they are looking for, which can lead to an increase in sales. On the other hand, a disorganized store can lead to confused shoppers, lost inventory, and fewer sales. 

If you track SKU numbers in your POS system (which we recommend), you can easily look up products to see if they are available or if you need to order more.

Sales Forecasting

When you are able to accurately track stock with SKU numbers, you can also more accurately forecast sales and anticipate your business’s needs. In turn, you are able to keep more of your best sellers in stock, while eliminating products that don’t perform well. This can also improve customer satisfaction, as they can rely on your business to always have the products they need. 

Store Organization

Knowing your biggest profit generators allows you to be smart about how you organize your store. For example, you can set up prominent displays for your best-selling items. On the other hand, you can create displays for items that may not be performing as well as hoped, in an attempt to boost sales. You can also group similar items together, so if you are sold out of one product, an alternative is readily available. 

SKU numbers can also help ecommerce merchants with store organization by informing them of how they should display products on their site. In addition, the “similar items you may like” section that is common on most ecommerce platforms is typically done through an algorithm that looks at your products’ SKU numbers.

How to Set up SKU Numbers

As you can see, having a SKU number system for your inventory will make your life much easier. Now it’s time to learn how to set up a SKU number system for your business. There are a couple of ways to do this. Some merchants use a spreadsheet, but we highly recommend using the inventory management system within your POS system (almost every POS system has some kind of inventory management infrastructure). 

Tracking your SKU numbers in your POS makes it much easier to track sales, locate items on your sales floor, and make smarter inventory decisions. But regardless if you track SKU numbers manually or via a POS system, the approach is the same. Here are the steps you need to take.

Step 1: Select SKU Number Identifiers

Before creating your SKU numbers, it’s important to keep in mind what you want to track. As we mentioned earlier, every business is different, so every SKU number will represent different product traits. Here are some common SKU number identifiers to consider, depending on your business type:

  • Product department
  • Store location
  • Product supplier/brand
  • Product feature
  • Product size
  • Product color
  • Product style
  • Product type
  • Product subcategory

When choosing the SKU number identifiers for your business, you’ll also want to keep in mind the size of your inventory. If you have a small amount of inventory, you may not need to include product subcategories or product features in your SKU number. However, if you have a lot of inventory, you’ll probably need more complex SKU numbers in order to accurately track every product.

Another consideration when selecting your SKU number identifiers are your customers. If customers frequently ask about a specific brand of product, you’ll want to make sure to include an identifier for brand in your SKU number.

Step 2: Create a Top-Level Identifier

Now let’s get into the actual creation of the SKU number. Remember: The SKU number should be at least eight characters long, but no more than 12 characters. The first two to three characters should be your top-level identifier. This would be the highest-level category your product can be placed into. So, for example, if the product is a golf club and your business is a sporting goods store, the first two to three characters would correlate to the golf department. Conversely, if you run more than one store location, it might make sense to use your top-level identifier to define the store location.

Step 3: Identify More Unique Product Traits

The next two to eight characters in your SKU number should be used to identify more unique product traits, such as product size, color, brand, or style. To avoid confusion, some businesses choose to identify suppliers with letters instead of numerals. 

Step 4: Finish With a Sequential Number

The last two to three characters of your SKU number should be a sequential number. This is basically assigning a number to each SKU to ensure it is unique and so you can identify newer inventory versus older inventory in your product line. For example, if you have two dresses in your store that come from the same supplier and have the same size, color, and style, the sequential number will distinguish one from the other. 

How to Set up SKU Numbers: Example

Now that you know how a SKU number is constructed, let’s walk through the process of setting up a SKU number for a series of products. For this example, let’s assume you operate a clothing department store, and you decide to assign SKU identifiers as follows:

Brand Identifier
Calvin Klein
CK
Banana Republic
BR
Tommy Hilfiger
TH

 

Category Identifier
Shirt
01
Dress
02
Pants
03

 

Color Identifier
Red
11
Blue
12
White
13

 

Size Identifier
Small
21
Medium
22
Large
23

 

Given these SKU number identifiers, here is what the SKU number would be for a red Calvin Klein dress in a size small:

CK02112101

We got this SKU number by taking the Calvin Klein identifier “CK,” followed by the dress identifier “02,” then the color red identifier “11,” and finally the size small identifier “21.” We added “01” onto the end as the sequential number as a way to distinguish this dress from other red Calvin Klein dresses in a size small that the store may have in stock.

Here’s another example for a white Tommy Hilfiger shirt in a size large:

TH01132301

Again, the “TH” represents the Tommy Hilfiger identifier, followed by “01” for t-shirt, “13” for white, and “23” for size large. With this system in place, you can help any customer who walks into your store to find a specific product (say a blue Banana Republic dress in size medium) simply by punching the product’s SKU number into your POS system (in this case, the SKU number is BR02122201).

While this is a simplified example of how SKU numbers work (most businesses will have many more products than this), the idea is the same—create identifiers for all your different product attributes and then assign them to specific products in order of importance.

Tips for Creating Your SKU Number System

Arranging SKU numbers is simple enough, but there are some factors to keep in mind when creating them. We’ll list them out here:

The first few characters should represent the most important trait.

Always use the first one to three characters to denote the trait that is of the highest level of importance to you. Then use the subsequent characters to denote traits of lesser importance. This will make it easier to sort your products by brand, item type, or department.

Avoid beginning SKU numbers with zero.

Some computers have a hard time understanding SKU numbers that begin with zero. They may interpret it to mean nothing, and only look at the subsequent characters in your SKU number. This way, “01397201” becomes “1397201.” As you can see, this dramatically changes what you might have intended the SKU number to mean. Avoid this hassle and don’t include any zeros to start your SKU number.

Avoid letters that look like numbers.

If you’re using an alphanumeric code, using numbers that look like letters, and vice versa, can create a lot of confusion. Think about it: If you have a SKU number that has both the letter “I” and the number “1” in it, are you going to be able to see that difference if you’re not looking very closely? Avoid this issue by setting up identifiers with letters that won’t be confused for numbers.

Don’t make SKU numbers too complex.

As we said earlier, stick to eight to 12 characters for your SKU numbers. Beyond 12 characters, the SKU becomes harder to remember and assign meaning to. So try and pick three to four traits of your inventory to create a SKU number with. Conversely, you can assign more meaning to your SKU numbers by making every identifier only one character long.

Use software to manage SKU numbers.

The best way to manage SKU numbers is with inventory management software. According to ecommerce expert and Fundera contributor Krista Fabregas, most order management, ecommerce platforms, and retail POS solutions have built-in SKU management that lets you add internal SKU numbers and track supplier SKU numbers for each product.

Most of these solutions will produce and print barcodes for each unique SKU number and also integrate with barcode scanners for inventory checks, order picking, and checkout. Popular systems, including Shopify, BigCommerce, Lightspeed POS, and Square for Retail all support SKU barcodes.

Use SKU Numbers to Help Your Business Run More Efficiently

SKU numbers can be a powerful technique for helping your business manage its inventory more efficiently and maximize sales. The key is to create a system and stick to it. This means assigning every piece of merchandise its own SKU number, and training your staff on how to read SKU numbers. Now that you know how to make a SKU number system for your business, try it out and see the results for yourself.

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Matthew Speiser

Staff Writer at Fundera
Matthew is a staff writer at Fundera. He has written extensively about ecommerce, marketing and sales, and payroll and HR solutions, but is particularly knowledgeable about merchant services. Matthew's writing has been published in Business Insider, The Fiscal Times, Best Company, and NJ.com, among others. Matthew was also a co-author for Startup Guide—a series of guidebooks designed to assist entrepreneurs in different cities around the world. He has a degree in journalism from the University of Delaware. Email: matthew.speiser@fundera.com.

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