Sell Through Rate

A sell-through rate is a key metric used in inventory management that helps estimate the quantity of inventory sold in a given time frame compared to the amount received during the same time. In simple words, it measures how fast and efficient a company is in selling its inventory and thus converting it into sales.

The Sell-through rate is a very important KPI in inventory management and can help retailers deal with problems of overstocking and understocking. Thus, if properly utilized, it can positively impact the profit margin and ROI of the business. The average sell through rate could prevent the management from underutilizing or having cash flow issues as well depending on the movement of their goods.

The Sell through rate is a very important KPI in inventory management. It 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 period. Sell-through rate generally means measuring the quantity of inventory sold versus the quantity of inventory received during a particular time frame. Thus, eventually, it means how fast the company converts the inventory into sales or revenue. A higher number of these key performance indicator is always preferable. It means the company is efficient in converting the inventory to revenue and will not consume a lot of extra cash to stock the excess inventory.

The sell-through rate provides valuable insights into the efficiency of a retailer's inventory management. A good sell-through rate indicates that products are moving quickly, reducing the likelihood of overstock and minimizing carrying costs. On the other hand, a low sell-through rate may suggest issues such as slow-moving inventory, poor product selection, or ineffective marketing strategies.

Let us understand the formula that shall act as the basis of our detailed understanding of the average sell through rate through the discussion below.

In simple words, it is expressed as a percentage of the ratio between the number of units or inventory converted to sales by the actual number of units received earlier for a particular time frame.

Now that our understanding of the basics is sufficient to understand the concept’s outline, let us explore the practical application through the examples below.

Example #1

Let us take an example of a retail outlet chain that sells instant noodles as one of their top-selling products. The retail outlet owner usually procures a huge quantity of instant noodles packets and stocks them so that he doesn’t face any limitations to the supply. 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 to hold 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 4,000 units were sold out of that.

Solution

Calculation of sell-through rate can be done as follows -

• =(4,000/5,000)/100
• = 80%

An 80% rate is 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 from the supplier. Doing both will increase the sell-through rate of the instant noodle for the retail outlet.

Example #2

Indian Terrain Fashions, a Chennai, India-based brand that started in the year 2000, grew from a single store to 250 exclusive brand outlets, 400 large format stores, and more than 1000 multi-brand stores.

They have followed demographic-specific trends and dynamic recalibration that has helped their sell-through rate by 5%. In the financial year 22-23, through this growth, they saved roughly Rs. 6 Crores.

A humble brand that started with the aim to provide pocket-friendly casual wear for men and children has grown into a renowned brand across the country with simple, actionable tactics and strategies such as the concept we are discussing in this article.

Businesses often miss out on taking practical or actionable steps in this regard and it often leads to either blockage of cashflow or underutilization of available funds. Let us understand how to improve the average sell through rate through the discussion below.

• Offering more promotions and discounts to increase the sale of a particular product.
• Ordering only required or minimal units from the supplier to avoid hoarding
• Shifting 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 margin.

Let us understand the benefits of having a good sell-through rate through the points below.

• Sell-through rates help businesses optimize inventory levels by identifying products that are selling quickly and those that may need adjustments or promotions.
• High sell-through rates indicate successful inventory management, reducing the risk of overstock situations and associated holding costs.
• Businesses can maximize profits by focusing on products with high sell-through rates, adjusting pricing strategies, and efficiently replenishing inventory.
• The metric aids in evaluating the effectiveness of marketing efforts, allowing businesses to refine strategies for products with lower sell-through rates.
• Regularly monitoring sell-through rates enables businesses to adapt quickly to market trends, changing consumer preferences, and seasonal demands, ensuring agility in inventory management.

Let us also discuss the other side of the concept as well through the limitations below.

• The Sell-through rate can indicate a problem, but it won’t tell the causes of the problem.
• It doesn’t consider factors like seasonality, style, and product hype.
•  It will not tell why a product is not selling and where to obtain the answer; one must do extensive research.
• It is more targeted with a short-term focus in mind.

Let us understand the differences between the sell through rate and inventory turnover through the comparison below.

Sell Through Rate

• The sell-through rate measures the percentage of inventory sold within a specific timeframe.
• It is calculated by dividing the total units sold by the initial inventory and multiplying by 100.
• Emphasizes the speed at which products are sold, offering insights into inventory movement efficiency.
• Particularly valuable for retailers, guiding decisions on inventory optimization, pricing, and promotions.
• The metric is based on the number of units sold, providing a clear measure of product movement.

Inventory Turnover

• Inventory turnover evaluates how efficiently a business converts its inventory investment into sales.
• It is calculated by dividing the cost of goods sold (COGS) by the average inventory during a specific period.
• Provides a broader financial perspective on the efficiency of inventory management.
• Relevant for assessing overall business efficiency and financial performance.
• Considers the financial aspect by using the cost of goods sold, providing insights into the financial effectiveness of inventory utilization.

This has been a guide to what is the Sell Through Rate. Here we explain its formula along with examples, how to improve it, and its limitations. You may learn more about financing from the following articles –

• Inventory Turnover
• Inventory Conversion Period
• Stock Turnover Ratio
• Inventory Control