RETAIL GLOSSARY

# Sell-through Rate

The percentage of inventory sold over a specific period of time, calculated by dividing the number of units sold by the initial inventory.

## What is Sell-through rate?

Sell-through rate, often referred to as the sell-through percentage, is a retail metric that measures the efficiency of inventory management by calculating the percentage of products sold compared to the total products available for sale during a specific period. It is typically expressed as a percentage.

A high sell-through rate indicates that a retailer is effectively selling its inventory and minimising overstock or unsold items, which can lead to increased revenue and profitability. Conversely, a low sell-through rate may indicate issues with product selection, pricing, or marketing strategies, requiring adjustments to optimise sales and inventory turnover.

## How Sell-through rate works

• Determine the Time Frame: Decide on the time period you want to measure. This could be a day, week, month, or any other period relevant to your business.

• Count the Initial Inventory: At the beginning of the chosen time period, count the total number of units of a particular product that you have available for sale in your inventory. This is your starting inventory.

• Record Sales: Track the number of units of that product that were sold during the same time period.

• Calculate Sell-Through Rate: Use the following formula to calculate the sell-through rate: Sell-Through Rate = (Number of Units Sold / Initial Inventory) × 100 For example, if you initially had 100 units of a product in stock and sold 60 units during the chosen time frame: Sell-Through Rate = (60 / 100) × 100 = 60%

• Interpretation: A sell-through rate of 60% means that you sold 60% of the initial inventory during the specified time frame.
A high sell-through rate indicates that your products are selling well and that your inventory is efficiently moving. However, a low sell-through rate suggests that you might have excess inventory, which could lead to storage costs and potential markdowns to clear unsold items. It's a key metric for inventory management and helps retailers make informed decisions about restocking, pricing, and promotions.

## Pros of Sell-through rate

1. Inventory Management: Sell-through rate is a valuable tool for efficient inventory management. It helps retailers identify which products are selling well and which are not. With this information, you can make informed decisions about restocking, replenishing popular items, and discontinuing or discounting slow-moving products. This can lead to cost savings and higher profitability.
2. Pricing Strategy: Sell-through rate assists in setting appropriate pricing strategies. If a product has a high sell-through rate, it may indicate that you can sell it at a higher price, maximising profit margins. Conversely, if a product has a low sell-through rate, you may need to consider price reductions or promotions to move the inventory.
3. Promotion Effectiveness: Retailers often run promotions or marketing campaigns to boost sales. By tracking the sell-through rate before, during, and after a promotion, you can assess its effectiveness. If you notice a significant increase in the sell-through rate during the promotion period, it indicates that the promotion was successful in driving sales.

## Cons of Sell-through rate

1. Limited Context: Sell-through rate alone may not provide a complete picture of product performance. It doesn't consider external factors such as seasonality, market trends, or changes in consumer preferences. Relying solely on this metric might lead to misinterpretation and poor decision-making.
2. Ignores Profitability: Sell-through rate focuses on the movement of products but doesn't account for the profitability of those products. A high sell-through rate doesn't necessarily mean high profits, as it doesn't consider factors like cost of goods, operational expenses, and pricing strategies. Retailers need to balance sell-through rate with profit margins to make sound financial decisions.
3. Doesn't Address Inventory Costs: While sell-through rate can help identify slow-moving inventory, it doesn't directly address the costs associated with holding that inventory. Retailers may still incur expenses for warehousing, storage, and capital tied up in unsold products. Managing inventory turnover effectively requires consideration of these costs.

## FAQ

Below you will find answers to common questions
What is the significance of a high sell-through rate for my retail business?
A high sell-through rate is generally a positive indicator for your retail business. It means that products are moving off the shelves quickly, which can help you maintain fresh inventory and reduce the risk of overstocking. A high STR often indicates that your product selection aligns well with customer demand. However, it's crucial to note that while a high STR is desirable, it should be balanced with profitability. Some high-STR products may have low margins, so it's essential to consider both factors when making inventory and pricing decisions.
How can I calculate sell-through rate for a specific product or category?
To calculate the sell-through rate for a specific product or category, use this formula:

Sell-Through Rate (STR) = Units Sold / Beginning Inventory × 100%

For example, if you initially had 100 units of a product in stock, and you sold 70 of them, the STR for that product would be:

STR = 70 / 100 × 100% = 70%

This calculation helps you gauge how well a product is performing in terms of sales relative to its initial stock level. It's a valuable metric for optimizing inventory management and making informed restocking decisions.