Short for Stock Keeping Unit (SKU) is a unique alpha-numerical identification tag that refers to a specific stock item in a retailer's inventory or product catalog. The SKU is most often used to recognize the product, product size or type, and the producer. In the retail industry, the SKU is a part of the rear-end inventory management system and allows a retailer to locate a product in their stock that may be in godowns or in retail shops.

It is often a machine-readable bar code, printed on product tags, that enables vendors/retailers efficiently scan and follow the inventory movement. Typically an alphanumeric combination of eight-or-so characters, SKUs may also be applied to intangible but billable products, such as units of repair time or warranties. Although SKUs differ from model numbers, businesses may embed model numbers within SKUs.
In any case, each business creates different SKUs for its goods and services. For example, businesses selling running shorts create different internal SKUs that reveal a product’s details, such as color, size, style, price, manufacturer, and brand, like, the SKU for black Lyra leggings in the ankle length style, size L(40), may read "LYR-AL-BLK-40."

The Importance of Stock Keeping Units

By adding SKUs to every product variant, retailers can easily know the available quantity of products and designate threshold limits to know when new purchase orders must be placed. SKUs let shoppers compare characteristics of similar items. For example, when a shopper buys a particular DVD, online retailers might show-off similar movies purchased by other customers, based on comparing SKU information. This method may increase a company’s revenue by triggering additional purchases.

Stock Keeping Units Versus Universal Product Codes (UPC)

Because companies internally build SKUs to follow stock movement, the SKUs for identical products change from retailer to retailer; allowing retailers customize advertising efforts, without hindrance from other vendors.

For example, if a company provides the SKU to advertise a certain discounted refrigerator, shoppers cannot readily compare price of the same refrigerator with other retailers, based on the SKU alone. This stops competitors from matching the advertised prices and luring away customers. In contrast, Universal Product Codes (UPCs) are same, regardless of which business is selling the products in question.

Example of usage of SKUs in modern retail

SKUs are making the shopping experience more efficient than ever before. For example, earlier store sales force would have had to visually scour the back stockroom, to hunt for a specific model of shoes in the accurate size of the customer. But now they can enter the SKU in an inventory management system, and know instantly if stock is available and where it is located.

How to make meaningful SKU Codes

Make your own SKU Code

Avoid using the manufacturer/wholesaler's code inside your SKU code. It’s a bad practice to just use the manufacturer’s code as a base and incorporate a few prefixes/suffixes to make your own. You would have to completely overhaul your coding system in case you change your manufacturer or wholesaler, if you use their code in your SKU. It is going to be very troublesome.

Decide What You Want Your Code to Say

Determine the information you require to access through the SKU code. Do not load the code with unnecessary details. The whole point of creating SKU codes is creating an identifier to represent a unique item. Use only information required for a successful identification of an item, but no more. For example, if the year of manufacture is irrelevant for a particular set of items, do not incorporate it in the code. It will just eat up space and would be prone to misinterpretation. Store this information under the product description tag, instead.

Use the Cascade Method

Codes must be logically understandable. For example, to sell cosmetics from different brands, a cascade chart for the information to be presented has to be prepared. Begin by taking the biggest set of information about your item first – in this case, ‘Cosmetics’ – and call it set ‘C’. Then you look at the next most relevant subset, for example, ‘Lipsticks’. Let us call that set ‘L’. Then you ask, what brand does this lipstick belong to? What colour is it? And so on. It is probable, that a typical SKU for pink, Revlon lipsticks - in this case - would look like == CL-REV-PNK-001. Keep adding attributes till you can uniquely identify that particular lipstick in your warehouse using only the code. Stop adding the questions as soon as this unique identification is possible. 

Fonts and Characters

Beware of confusing characters like – O (letter 'O') and 0 (number zero), I (uppercase letter 'I')and l (lowercase letter 'l'), etc. It might seem insignificant, but the font used to print the codes may confuse the reader. Use bold, serif fonts that clearly define most characters without confusion. Avoid using symbols in SKU codes. Excel may auto format the numbers, confusing them with a date if special characters like the front slash (/) are used to create breaks within the code. Other characters like $ and @ are too confusing and can cause formatting errors.

Use an Inventory Management System

Use an inventory management system to store and track the SKU codes. It allows most of your work to become automated, simplified and saves and sets down the formats for future reference. Excel files are prone to corruption, damage and confusion. But inventory management systems give you a cleaner, more efficient perspective of the state of your warehouse.

Here are a few things to remember for your SKU naming pattern:

• Stay between 8 and 12 characters
• Begin the number with a letter
• Never use zero
• Keep the format easy to understand
• Ensure each letter and number has a meaning

Each marketplace calls it by a different name. Below is a list of the different names given to SKU codes