What is Sell Through Rate?

Explanation

The 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.read more 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 indicatorKey Performance IndicatorKey performance indicators (KPIs) help a company evaluate its overall business performance against the set goals over a period. These can differ depending on the types of firm or industry and the assessment criteria. Also, most firms employ these indicators to stay ahead of the competition.read more 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.

Formula

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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.

Example

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.

How to Improve Sell Through Rate?

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

Sell Through Rate vs. Inventory Turnover

Sell through rate is targeted for a short-term focus where one wants to see what percentage of inventory is moving over the month, whereas, inventory turnover, the focus is generally long term or the period taken into consideration is generally a year.  Sell through rate tells us how efficiently the company has sold its inventory procured from a supplier to the final consumers over a period as small as a month. In contrast, inventory turnover measures the number of times inventory is sold or used in a period, generally a year.

Limitations

  • 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.

Conclusion

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.

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 –

  • Inventory TurnoverInventory Conversion PeriodStock Turnover RatioInventory Control