What is Sell Through Rate?
A sell through rate is a key metric used in inventory management which helps in estimation of the quantity of inventory which is sold in a given time frame compared to the amount of inventory which was received during the same point of time. In simple words, it measures how fast and efficient a company is in the process of selling its inventory and thus converting it into sales.
Sell through rate is a very important KPIKPIKPI stands for key performance indicators to measure the efficiency of an organization concerning the way it has been achieving all its long-term and short-term goals. Companies use this performance indicator to evaluate the effectiveness of all their decisions in business operations. in the field of inventory management. This is generally used in the retail industry to a great extent. Generally, a company will always try to maximize it. A higher number of this metric means that a company is very efficient in converting its inventory into sales within a short span of time. Sell through rate generally means the measure of the quantity of inventory sold versus the quantity of inventory received during a particular time frame. Thus, eventually, it means how fast the company is converting the inventory into sales or revenue. A higher number of this key performance indicator is always preferable, and it means the company is really efficient in the conversion of the inventory to revenue and will not consume a lot of extra cash to stock the excess inventory.
In simple word, it is expressed as a percentage of the ratio between the number of units or inventory which has been converted to sales by the actual number of units which were received earlier for a particular time frame.
Let us take an example of a retail outlet chain which sells instant noodles as one of their maximum selling product. The owner of the retail outlet usually procures a huge quantity of instant noodles packets and stocks them so that he doesn’t face any kind of limitation to the supply, and hence the demand-supply curve is properly met. He plans to do some proper inventory management because off late, he finds a lot of stock is getting hoarded and not getting sold in time. He has to pay excess storage fees in the process of holding back these excess stocks. Thus he takes a very recent time frame for calculating the sell through rate of instant noodles in his store. He finds that last month, he had ordered 5,000 units of instant noodles from his supplier, and out of that, 4,000 units were sold.
Calculation of sell through rate can be done as follows –
- = 80%
An 80% rate is really a good number, which means every month out of all the stock he receives for instant noodles, 80% of it is converted to sales leaving only 20% of the stock as carrying forward inventory. Now, there are two ways to increase the number. One, the store owner can go for heavy promotion of the product to increase the sales rapidly or else order less to some extent from the supplier. Doing both this will increase the sell through rate of the instant noodle for the retail outlet.
How to Improve Sell Through Rate?
- Offering more promotions and discounts so as to increase the sale of a particular product.
- Ordering only required or minimal units from the supplier so as to avoid hoarding
- Shifting of performance measurement criteria to the end consumer by making products readily available.
- Reduction of expensive stock-outs that eats away a major chunk of the profit.
- Making products more affordable by reduction of the total landed cost of products.
- One strategy can be selling more for less and boosting the profit marginProfit MarginProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. .
Sell Through Rate vs. Inventory Turnover
Sell through rate is moreover targeted for a short term focus where one wants to see what percentage of inventory is moving over a period of the month whereas, inventory turnover, the focus is generally long term or the period taken into consideration is generally a year’s time. Sell through rate tells us how efficient the company has sold its inventory procured from a supplier to the final consumers over a period which may be as small as a month, whereas inventory turnover measures the number of times inventory is sold or used in a time period which is generally a year.
- Sell through rate can indicate a problem, but it won’t tell the causes of the problem.
- It doesn’t take into consideration factors like seasonality, style, and product hype.
- It will not tell why a product is not selling where to obtain the answer; one has to do extensive research.
- It is more targeted with a short term focus in mind.
Sell through rate is a very important KPI in inventory management and can be really helpful in helping retailers dealing with problems of overstocking and understocking. Thus, if properly utilized, it can positively impact the profit margin and ROI of the business.
This has been a guide to Sell Through Rate and its definition. Here we discuss its formula along with examples, how to improve it, and its limitations. You may learn more about financing from the following articles –