What Is Sell Through Rate & How To Calculate It

Post on Tuesday, June 19th, 2018 in Accounting

Sell through rate is a calculation that evaluates the performance and ROI of certain inventory items during sales. To be more specific, it is a comparison of the inventory amount that is received from a supplier and the inventory amount that is actually “sold through” to customers of the vendor.  

The sell-through concept is similar to inventory turnover. However, sell through rates are calculated based on shorter periods, such as months, weeks, or even days (for fast moving items). On the contrary, inventory turnover calculations are based on longer periods. Therefore, if you would like to track the sales behavior of specific items and need quick results, do not wait until the end of the year or quarter. Calculate the sell through rate for whatever time period is most applicable to your business. This can go a long way in cutting down on inventory carrying costs and finding out your ideal reorder point for specific products. 

Retail inventory management is a complex process and learning a reliable sell through calculation is one of the ways to make it simpler. In this article, we are going to give you details about what sell through is and how to calculate it more efficiently. 

Sell through calculation is helpful in the following cases:

  • To see how well one product is selling compared to another
  • To define which time period (e.g. a month) shows better results
  • To find out at which locations the product is sold best

Sell through rate calculation is crucial when monitoring the overall efficiency of a business. It helps to detect both the slow-moving and high-selling items as well as find out whether the supply meets the demand. When calculating sell through, experts recommend grouping together products that have the same time period of selling activity and/or products that are sold into the similar types of stores.

For example, if a product is seasonal and sold only during the month of June, then you shouldn’t compare it against another product that sells during the winter. Similarly, comparing sell through rate for a product in a group of stores in an area with higher income levels will produce wonky results if you compare these figures with a group of stores surrounded by lower income shoppers. 

Sell Through Formula

The standard sell through formula has two variations:

  • Sell Through = Units Sold / (Units Sold + Units on Hand)
    • This variant uses the number of units at the end of a designated period to give a better overview of which items are sold more frequently.
  • Sell-Through = Units Sold / Units Received
    • This formula focuses on incoming products, so you can use it to track products that are regularly restocked.

Let’s consider an example of sell through rate in action

You purchased 100 pairs of running shoes for your sporting goods retail store and sold 75 pairs after a month.

Your sell through percentage based on the first formula will be as follows:

(75 / 100) x 100 = 0.75

In other words, you have sold 75% of your stock during a month.

There is no “gold standard” for a perfect rate of sale. It depends on a range of factors, such as:

  • length of a calculation period (for some companies it can be a week, for example)
  • industry
  • historical trends
  • pricing   
  • seasonality
  • store location
  • retail category

If a sell through rate is too low, it means that the product is either selling slowly or is overstocked.

This can be fixed with the help of certain activities, such as advertising campaigns, product positioning, price changes, or discounts. However, sell through rates that are too high can also be a problem because it means either too little stock on hand or that the item is priced too low.

The problem of having too little stock on hand can easily be solved with specialized inventory management software. You can use this software to specify the reorder point, which is when your remaining inventory reaches a level where it needs to be replenished by a supplier. Inventory management systems can track your inventory and send automated warnings when a product is low or one reaches its reorder point.

Good software does a whole lot more than this, like handles vendor management and purchase order management, but automating these other basic tasks can save you a lot of time.

How Sell Through Calculation Helps Your Business

Sell-through calculations can improve your business in a variety of ways, such as:

  • Management of unexpected sales boosts – Increases in sales are certainly good news because they boost profit. However, if you do not expect them, they can cause problems such as inventory shortages. However, a sell thru rate can help you manage such boosts. For example, you can regularly monitor a weekly rate of sale for popular items. After several weeks, you will have established an average weekly sell through percentage for a specific product. If any week’s sales significantly exceed the average weekly sell through, you should analyze the sales and determine the reason for such increase.
  • Management of seasonal products – Retailers who sell seasonal products, such as clothes and shoes, can also benefit from a sell through formula. For example, your shop sells swim suits and you order 1,000 items on May 1, 2018, with the purpose to sell out all of them by September 14, 2018. There are 18 weeks between these two dates. If you want to sell the swim suits evenly throughout this, you can track the weekly sell through rate and compare how the product is sold each week. As a result, you will have an idea of whether you achieve your goal of selling out on time.
  • Reduced number of slow moving items – If your store sells same items with different designs, e.g. T shirts of different colors or with different funny quotes, then you can use the sell through rates to compare how quickly black T shirts sell against white T shirts, and so on. If, for example, black tees have a better rate of sale than white tees, then you should consider increasing the inventory of black tees and reducing or completely removing the white ones.

Now you know what sell through means, how to calculate sell through rate, and how this rate can improve your sales.

However, you need a lot of inventory oversight to calculate sell-through rate in the first place. So, having a robust, easy-to-use inventory management system will help you speed up this process and eliminate errors in your calculations. 

Dynamic Inventory can simplify your inventory management. Get in touch to try a free demo and see how our software can help your business succeed.

Adam is the Assistant Director of Operations at Dynamic Inventory. He has experience working with retailers in various industries including sporting goods, automotive parts, outdoor equipment, and more. His background is in e-commerce internet marketing and he has helped design the requirements for many features in Dynamic Inventory based on his expertise managing and marketing products online.

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