Here’s How to Calculate Your Sell-Through Rate (+ 5 Tips to Improve It)

Your sell-through rate is the percentage of your inventory sold to customers.

Often calculated monthly, sell-through rates help show sales trends and how different styles and sizes of the same product fare against each other.

If you want to know your customers better and minimize overstocking, calculate your sell-through rate regularly.

What is a sell-through rate?

A sell-through rate (STR) is the amount of inventory sold within the month (or another time period) as a percentage of the amount of inventory you received from your manufacturer(s) during the same period. 

In terms of performance, your STR is the measurement of monthly sales against a given target. Measuring your STR can help you track sales, adjust your goals, and keep your supply chain efficient. 

Though sell-through rates vary from industry to industry, the ideal STR is at or above 80%.

Why is your sell-through rate important?

Your sell-through rate is important for several reasons.

Identify popular and unpopular products

Your STR is not just a blanket measurement of overall sales. Retailers often calculate their STR by supplier, product line, store location, and more. 

Your STR is thus a powerful tool to help you understand which products are most popular. This information can then be used to optimize inventory and better judge customer demand.

Mitigate storage costs

A low sell-through indicates that your inventory is poorly forecasted and that you’re likely storing more than you need. Use your STR to better understand how you can save on storage costs.

Overstocking is expensive, especially of stock that quickly expires or goes out of season. Storing unsold inventory also takes up space that could be used to store products that your customers will buy. 

One way to determine if stocking more heavily is right for you is to consider storage costs against expected shipping costs or profit loss from stockouts, both of which have grown dramatically during the pandemic. 

Optimize supply lines

Supply chains are prone to unexpected delays, especially during the COVID-19 pandemic. Consumers, retailers, vendors, and manufacturers are all struggling to make up for bottlenecks in supply lines.

Many retailers compensate by overordering —thus overstocking — before understanding what products will actually sell. Your STR provides clarity on trending sales, so you can work with your suppliers to order the right products ahead of time and stock up for high-selling items.

Measure success

Every retailer has sales goals. Goals help you track performance, hold your sales associates accountable, and motivate your team.

Your STR helps you measure your monthly revenue as well as increase sales by supplier, product line, store location, sales channel, and more. STR can be used to measure sales through any lens and better understand how different parts of your retail business are performing.

Start your free 14-day trial of Shopify—no credit card required!

Manage your cash flow

Your STR is another way to examine your revenue against the cost of your inventory.

An STR that drops over time tells you that you’re spending more money than you’re making. Alternatively, a growing STR means that your profit margin is rising and will continue to do so as you adjust your inventory orders and storage costs.

How to calculate your sell-through rate

To calculate your sell-through rate, the data points you need are total sales during the month, and the total amount of stock available for sale that month. 

(You can also calculate your STR annually, quarterly, or weekly depending on your sales goals.)

Sell-through rate formula

Use this formula to calculate your sell-through rate:

% sell-through rate = ( total sales / stock on hand ) x 100

Sell-through rate example

Let’s say you own an ice cream shop and want to start selling cupcakes. For September, you order 1,000 cupcakes, 200 each of 5 different flavors: Vanilla, Chocolate, Red Velvet, Carrot, and Birthday Cake.

(If 1,000 sounds like a lot, don’t worry. You’re a very popular ice cream shop.)

At the end of the month, you calculate your sell-through rate to understand how much your customers liked the cupcakes. You learn that of the 1000 cupcakes, you sold 800.

( 800 / 1000 ) x 100 = % sell-through rate

0.8 x 100 = 80%

So, in September, your cupcakes had an overall 80% sell-through rate — so far, so good. Clearly, your customers are fans of your new menu addition.

Next, you’re curious how your customers liked each flavor. Red Velvet, Carrot, and Birthday Cake are more expensive than the others, so you want to be sure to order only those that will sell.

You take the number of sales for each flavor and divide each by the total number ordered, 200:

• Vanilla: 190 / 200 = 95% 
• Chocolate: 180 / 200 = 90%
• Red Velvet: 175 / 200 = 87.5%
• Carrot: 100 / 200 = 50%
• Birthday Cake: 125 / 200 = 62.5%

According to September’s sell-through, Vanilla and Chocolate were the most popular. You’ll order 200 each for next month. Red Velvet was also a hit, so you’ll order 200 of those, too.

Carrot didn’t sell as well as you thought, so you decide not to re-order any of that flavor. 

Lastly, while Birthday Cake didn’t hit your 80% STR goal, it did come close. Some customers did enjoy that flavor. For that reason, you’ll only order 100 for next month.

Sell-through rate vs. inventory turnover

Your inventory turnover is a measure of how frequently you sell your inventory. It calculates the time passed between when you purchased an item and when you sold it to a customer.

Like sell-through rate, your inventory turnover ratio is an integral metric for decisions regarding pricing, supplier relationships, merchandising, and more.

Inventory turnover ratio

Use this formula to calculate your inventory turnover ratio:

% inventory turnover = ( cost of goods sold / average inventory ) x 100

To calculate your average inventory:

Average inventory = ( beginning inventory + ending inventory ) / 2

Similarities and differences

Like sell-through, a high inventory turnover ratio indicates a healthy sales velocity. However, a high inventory turnover ratio can also mean you don’t have enough inventory to support sales at the current rate, and a low ratio can mean a stock surplus or low demand.

Another similarity between the two is how they vary between retail categories (as we’ll discuss next). For example, consumer packaged goods typically see a high inventory turnover, whereas luxury goods like cars or jewelry have low inventory turnover ratios and longer sales cycles.

While sell-through tells you the amount of inventory sold, inventory turnover tells you the speed of your sales.

Your sell-through rate informs storage, inventory, sales, and merchandising decisions. On the other hand, your inventory turnover ratio helps you make better decisions about pricing, manufacturing, purchasing, and warehouse management.

What is a good sell-through rate?

There is no single answer to this question — it all comes down to what category you are in and what time period you are tracking. 

Industry-wide standard

The industry-wide standard for a good sell-through rate is 80%. The average sell-through rate typically falls between 40% and 80%.

Average sell-through rates by industry

As noted, different categories tend to have different average sell-through rates. According to Accelerated Analytics, here’s how sell-through varies among eight retail categories across three different windows of time:

As you can see, your sell-through rate can increase over time, as more customers browse and buy your inventory. To make meaningful comparisons, it’s important to measure sell-through consistently over the same time period.

How to improve your sell-through rate

So, you’ve calculated your sell-through and find that it’s low. Here are some expert-inspired ways to raise your sell-through rate and grow your business.

Lower inventory levels

Retailers can no longer afford to acquire inventory and then forget about it. Merchandise that has been on the floor for ten weeks without selling has a slim chance of selling at a profit, and that chance decreases with each passing day.

If your sell-through rate is trending lower and lower, considering decreasing your inventory levels. You may choose to cut or replace slow-selling products altogether (as we discussed in the cupcake example above).

Promotions and discounts

If you’re selling your sweaters at full price but not as rapidly as you want, the issue could be how much inventory you ordered in the first place. 

Let’s assume an item is out of season or you just have a handful of the less popular sizes left. To create room for new inventory, it makes sense to discount existing products.

While this may appear to be a tempting way to boost sales, keep in mind that you’ll also be reducing profit margins. Discounts and promotions should be applied sparingly and only when they make sense.

While markdowns are a quick way to enhance inventory turnover, generate cash, keep fresh goods flowing, and remedy purchasing mistakes, they should solve problems rather than create new ones.

Smith continues, “Before you start mass discounting at a percentage that appeals to you, make sure you’ve calculated how much of a blow your margin will suffer once you’ve put a sale figure on it. A 2% reduction in markdowns results in a profit increase of nearly 1%.“

Examine seasonality

Seasonality plays a role in how much inventory you sell within a given time frame. For example, your sell-through rate of sandals in December is likely not as high as in May. Similarly, I’d bet your sell-through rate for Christmas trees is zero in March.

While your STR doesn’t account for seasonality, it may highlight a few products or product lines that are out of season. This can be remedied through demand forecasting.

Nunzio Ross is the CEO and Founder of Majesty Coffee. “In the coffee and espresso machine industry, our machines’ average sell-through rate is at 78% — a strong STR, so our company always finds ways to maintain and improve this metric,” says Nunzio. 

“[For demand forecasting], our company looks into the seasonal and brand demands from our consumers. This is why we have a recommendations list for both new and old clients on the best machine deals in the market.”

Since STR as a sole metric isn’t enough to forecast demands, other metrics that Nunzio’s team looks into include order cycle time, perfect order performance, and customer satisfaction levels.

“These metrics reflect in our sell-through data. Ensuring that orders reach our clients on time and in perfect shape is the key. Consumer satisfaction plays a critical role in our STR growth and maintenance,” says Nunzio.

Bundling

Bundling is combining two or more items to be sold at a discounted price. Retailers often use product bundling as a way to cross-sell or upsell as well as reduce the “pain of paying.”

It’s also a good way to sell slow-moving items and surplus inventory, especially if your products expire quickly or go out of season.

Since all of his products have a shelf life, Brian Anderson, Marketing Director at My Supplement Store, takes his sell-through rate very seriously. “One of the most powerful strategies we have implemented to improve our sell-through rates online is with cross-sells,” says Brian.

“We combine products with a low sell-through rate with products with a high rate, both online and in our brick-and-mortar store. Both strategies have minimized the number of products we’ve had to heavily discount or throw away due to expiration.”

Jeff Moriarty, Marketing Manager at Moriarty’s Gem Art, found bundling also improved their sell-through rate:

“Anytime we sell a ring, we introduce a similar pair of earrings that would bundle great together. We also offer an added discount if they purchase both.”

Increase visibility

More shoppers mean more sales — and a higher sell-through rate. Brainstorm potential marketing strategies to increase the visibility of your retail store. 

Consider collaborating with large retailers on initiatives that promote your brand and products to bring new customers in, perhaps via branded or product-focused remarketing, advertising, or Instagram posts and stories.

Similarly, use social media features to drive visibility, such as the “swipe up” function on Instagram stories or shopping advertising on Facebook. This enables shoppers to go directly to your product page, thereby boosting the probability of conversion. 

In certain instances, it may make sense to collaborate with an influencer or group of influencers that are relevant to your audience. 

Sell items faster with improved sell-through rates

Keep an eye on your inventory data and prioritize these sell-through strategies when you see non-moving merchandise. Use your sell-through data to prepare for quick reorders for trending products. 

Remember: proactivity means better profits. Armed with your sell-through rate and a motivated sales team, you can improve your retail sales in no time.

To calculate your sell-through, however, you’ll need pristine data and an easy platform to capture it. See how Shopify POS may be the platform you need for your sell-through needs.

Source