One of the KPIs that you use to analyze your inventory & buying and also the performance of your suppliers is the sell through rate (aka. Sell-thru rate). Sell through rate represents the number of items sold out of the number of items received and is measured for a given period (e.g one month or entire season).
Here were are going to show how to calculate this KPI and also how to read the report and act on it.
What is The Sell Through Formula?
Sell Through Rate = Number of pieces sold ÷ Number of pieces received x 100
Example
You bought 50 pieces and until today sold 25 pieces
Sell Through = No. of pieces sold ÷ No. of Pieces received x 100
Sell Through = 25 ÷ 50 x 100 = 50%
How to Analyze & Use Sell Through Report ?
The sell through report can be useful in many ways. This includes evaluating collection performance, taking action with regards to markdown, assessing suppliers performance and improving your buying skills.
1. Assess the performance of a collection & take action
Once you launch a new collection or a new season in the store, you start monitoring its performance in order to assess when you need to start applying markdowns in order for this stock to be sold out on time (i.e by end of season).
The way you do this is by generating a report like the one below and then see the sell through value for the different categories/ classes/ sub classes and also for the collection as a whole.
Now the question that often gets asked here is “How much is a good sell thru rate”? And the answer for that is “It depends.” It depends on when you are checking the sell through rate and the expectation for that time.
Example:
If we’ve just launched a new collection and after a week the sell through is 60%, this is bad news. Of course it might mean that the collection is selling well, but most probably in this case it means that the buyer bought much lower than what he should have bought or for the level of expected sales.
This could be checked by evaluating the level of sales for that period. If the sales are as budgeted and comparable to last year same time, then probably the buyer bought less or the OTB budget was not calculated properly based on the sales budget. If the sales are doing exceptionally well and much higher than the budgeted, then it is a missed opportunity but not really a buying mistake.
Read also: Open to Buy: How Much Inventory Do You Need
On the other hand if the collection has been trading for 6 months and then went on Sale and still the sell through is only 60%, then it might mean that this collection is not performing well. Could be the case that the styles are not appealing for the the customers or the prices are way off. In this case you will proceed with the next point.
What Action to Take in This Case?
If a collection is not performing as expected it has to start being marked down at different discount levels. Usually the discount is gradual and concurrently the sell thru rate is monitored. After a while the discount is increased until the majority is sold out.
In many cases you might not be able to clear a stock 100%. Sometimes you will subject it to different discounts and still you will end up with some remaining stock that you have to write off.
That’s why it is essential to understand the different types of gross margin, because you almost never sell a product completely at its intake margin. So you should take into consideration from the beginning while you are doing your pricing and your sales budgeting all the markdowns that you will have to run to clear any products.
2. Negotiating with suppliers
The sell through rate is a key measure of a supplier’s performance. Actually it is a common practice that the supplier will ask you to send them the sell thru reports for their products periodically.
This KPI tells you whether the styles, quality and product features from this supplier are clicking with the customers. It also tells whether the price is right or not suitable for this market or for the level of product quality.
That’s why sell through rates are a point of discussion during supplier negotiations and you can definitely use it to get better prices, so you don’t have to shoulder the discounts alone. If your intake margin form this supplier is way higher than the realized margin that you are getting at the end of the season/year, then it means that you are applying a lot of markdown to clear their products. In this case request a reduction in price or assess if this supplier is profitable for you at all.
Read more: Supplier Bargaining Power: How to Reduce it?
3. Improving Your Buying
Besides using this KPI to judge whether or not you bought the right quantity or calculated the right buying budget, you can also use the feedback you are getting from the sell though rate in finding out which products and styles are selling well and which ones you need to stop buying.
Usually when you generate the report like the above you will segregate it also by class, style and even SKU if you want. You then go to the SKUs or styles that have high sell thru and make sure to give them a higher budget next time and vice versa for the ones with low sell thru rate.
Many people make the mistake of missing this precious insight and ordering based on the numbers they got from last year’s sales.
Example
Some people might assume that since we sold 100 pieces from this item last year, then we need to buy 100 pieces (or 102 based on growth of 2%) for this year.
However; it might be that you sold 100 pieces because you only had 100 pieces available. If the sell through of this items was 100% and it reached that number within few weeks only and without any discounts, then you definitely have the opportunity to increase your sales from this item way above 100 and in this case need to order accordingly and not according to what you sold last year.
This is where the sell through rate comes in handy and helps the buyer in making better decisions.
How Can I Improve My Sell Through Rate?
Once you start applying the 3 points we listed above, your sell thru rates will automatically start improving over time. That’s because you’re taking the feedback from the numbers and applying it to future supplier & product choices and pricing decisions. By time, you will find that you are no longer in need to run huge promotional campaigns or discounts to clear your merchandise, because your products are acting exactly as expected.
This will also reflect on your profitability as your realized margins will increase. That’s why I always believe that buying is the most important retail function.
Read also: 4 Reasons Why Buying is The Most Important Retail Function
Considerations
As we’ve mentioned before in analyzing sales reports, don’t judge a product that has zero sales or low sell through rate quickly. In fact in many cases you will find that this product was not displayed properly on the floor, or that the simple act of highlighting it in the window will increase its sales.
So the first action to take before resorting to discounting is to change the display and monitor the sell-thru.
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Retailer & Founder of Retail Dogma, Inc.
Rasha has 14 years of retail & ecommerce experience. She has started an ecommerce business in 2008, and later worked at H&M, Bath & Body Works, Victoria’s Secret and Landmark Group. She’s lived in 4 different countries, speaks 3 different languages and holds an MBA in Strategic Management & Marketing.
You can connect with her on Linkedin.