If you’re a retailer, you know that the financial health of your business cannot be measured by turnover alone. Retail is typically a low-margin sector, and even if you’ve managed to maintain a healthy turnover in challenging times, this does not necessarily mean your business is in good financial health. While e-commerce companies generally fare better in terms of margin, the comforting metric of turnover can still be a siren song that leads you into disastrous waters.
Although profit margin is the one metric to rule them all for retailers, it’s by no means the only KPI that retailers need to keep an eye on. Here we’ll look at how to calculate your sell-through rate and why it’s of paramount importance for retailers.
What is a sell-through rate?
Your sell-through rate is the relationship between the amount of inventory that you sell and the amount that you purchase from your supplier or manufacturer within a given time period. Broadly speaking, it measures how long it takes for inventory to become revenue. While it’s predominantly used by retailers, it’s an important metric to understand for any business that needs to manage an inventory.
Why does sell-through rate matter?
The sell-through rate can have far-reaching and lasting implications for your business expenses, cash flow and, of course, turnover.
The better you know your sell-through rate, the better positioned you are to identify items that aren’t selling as well as you’d like and product lines that prove popular with customers. Products with low sell-through rates can be prime candidates for discounts, upselling or bundle deals.
Turn a blind eye to your sell-through rate, however, and you could find that you’re left with increased storage and warehousing costs, as well as low customer conversion rates, even if you experience good footfall or online reach.
How to calculate your sell-through rate
Calculating and tracking your sell-through rate regularly puts you in the driver’s seat. It prevents you from typing up your liquidity in stock that nobody wants to buy, and from having to turn away customers because you’ve sold out of popular items.
What’s more, it’s easy to calculate.
Start by tracking the total number of units sold and the existing inventory for the month, quarter or year that you want to measure. To calculate your sell-through rate, divide the total number of units sold by your inventory at the start of the period. Then multiply this figure by 100 to express it as a percentage. The higher the percentage, the less inventory you have gathering dust on the shelf or in your warehouse.
Tracking your sell-through rate is easy once you know which data sources to use. There are all kinds of retail dashboards that can give you quick and easy access to raw sales data, inventory volume statistics and transaction volumes.
However, if you don’t have the budget to invest in new software, you can use data gleaned from your regular stocktaking.
An example of sell-through rate in practice
So, now that we understand the theory behind sell-through rates, what’s a good example of how to use them in practice?
Let’s say you run a boutique clothing store. You have a physical shop in a prime high street location and you consistently get high volumes of foot traffic. However, you notice that while your shop is never empty, you still have a lot of items that have been left on the rails for weeks or even months.
Calculating your sell-through rate can give you an overall impression of how specific products or product lines are selling. You can then use this data to optimise displays and put the most popular products front and centre, while ensuring that items with much lower sell-through rates are generously discounted when you throw an end of season sale.
We can help
If you’re interested in finding out more about calculating sell-through rates, then get in touch with the financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.