How to Forecast Inventory Demand with Sell-Through Rate

How to Forecast Inventory Demand with Sell-Through Rate

Forecasting demand is essential for retailers to accurately predict how much of a product they should purchase. The inventory a retailer buys is directly related to your cash flow and, if you’re either carrying extra stock or not enough, you’re effectively losing money either through discounts or lost sales altogether. 

One study found that retailers lose $1.1 trillion globally as a result of overstocks and out-of-stocks. To prevent over or understocking, you need to know when to reorder, how much to order and approximately how long it will take to sell. 

One essential inventory metric to forecast demand is sell-through rate. With it, retailers can predict demand for a product and purchase the right amount from suppliers and manufacturers, avoid discounting and maximize profits. 

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What is sell-through rate?

Inventory sell-through rate measures the amount of inventory a retailer sells in relation to the amount they purchased from a manufacturer. Generally speaking, retailers use sell-through rates to estimate how quickly they can sell a product and convert their initial investment into revenue. 

Moreso than knowing how much and how quickly they’re selling a product, sell-through rates help merchants know how efficiently they’re turning over their inventory and avoid costs related to storage or discounting. 

 

Why measure sell-through?

Measuring sell-through is an excellent way to measure the effectiveness of the merchandise you purchase from manufacturers or suppliers. It helps merchants understand how quickly products from certain manufacturers sell.  

With that knowledge, merchants can make smarter inventory purchasing decisions and assure that they carry enough stock to meet demand while not carrying too much.

 

Sell-through rate and inventory management

Inventory management is a delicate balance. If a retailer holds too much, they may have problems selling it all at full markup. If they don’t have enough, they might not be able to support demand from customers. 

Sell-through rate can help retailers make adjustments to what products they buy based on how quickly they sell. 

Retailers can calculate sell-through rates by product type, product category, brand, or any other category they choose from their retail POS system. Calculating the sell-through rate for any of these categories tells you whether or not investing in products (and what type of products, if you want to get that specific) from that manufacturer yields a fast ROI. 

A high sell-through rate indicates that a retailer sold the inventory quickly in a given time period. Moving inventory fast and at full markup keeps gross profit margins as high as possible. 

A low sell-through rate is an indication that a retailer isn’t selling those products as quickly as they expected. Inventory that doesn’t sell fast risks needing to be discounted, which impacts profit margins and lowers your ROI. 

A product’s sell-through rate isn’t necessarily that black and white though. While it may indicate whether or not there was a strong demand from costumers, it doesn’t reveal the causes. A product’s popularity is largely dependent on a number of factors: seasonality, style and the social currency known as hype

A low sell-through rate won’t tell you why a product isn’t selling. To do that, you need to dig deeper, explore trends and get feedback from your customers. 

 

How to calculate sell-through rate

Sell through rate is calculated by dividing the number of units sold by the number of units received, then multiplying the sum by 100. 

Most retailers calculate sell-through every 30 days. After 180 days of sitting on shelves or in the stockroom, that product is considered dusty inventory and should be discounted and sold to make room for new, seasonally relevant products that can be sold at full markup. 

Sell-through rate formula 

Formula for calculating inventory sell through rate

Sell-through rate example

Let’s say an apparel retailer buys 100 units of a specific brand of sweater. Within a month, the retailer sells 75 units. To calculate that sweater’s sell-through rate, the retailer does the following: 

Sell-through rate = (75 / 100) x 100

Sell-through rate = 0.75 x 100

Sell-through rate = 75%

A sell-through rate of 75% in 30 days is a strong result. If the retailer wanted to improve that product’s sell-through in the future, they have several options. 

 

How to improve sell-through

Looking at the above example, there are several ways the apparel retailer can improve sell-through for their sweaters, each with pros and cons. 

1. Launch a promotion

While this option may a tempting way to accelerate sales, be mindful that you’re lowering profit margins as a result. Promotions and discounts should be used sparingly and only when it makes sense to do so. 

Let’s say the product is no longer in season or you only have a few less popular sizes left. It makes sense to discount and sell those older products to make space for fresh inventory. 

If, like the sweater example above, you’re selling those products at full price, but just not as quickly as you’d planned, perhaps the root of the issue is how much inventory you ordered in the first place.  

2. Order less

If the merchant was expecting to sell through all their inventory of that sweater within 30 days, perhaps the issue is that they ordered too much to begin with. Had they purchased 75 units, their sell-through would be 100%. 

Rather than purchase inventory based on gut instincts, consider researching the viability and popularity of a product before submitting a purchase order

Monitoring sell-through, along with regularly monitoring the sales reports from their point of sale system’s backend, can result in better inventory purchasing. Rather than buy too much or too little, you can order the perfect amount to meet demand and keep your stockroom for fresh merchandise. 

 

The limitations of sell-through 

While sell-through rate certainly gives merchants insights into how quickly products from certain manufacturers or suppliers sell, it’s important to note that forecasting demand cannot be done using that metric exclusively. 

There’s a host of behavioral and qualitative factors that the best retailers also monitor regularly. For one, retailers should understand their customers, local market tendencies and overall trends in their space. 

  • Do customers shop seasonally or is the product in demand all year? 
  • What sizes, colors and fits are popular with customers? 
  • Do your customers have an affinity towards certain brands? 
  • Are your customers quick to jump on trends? 

While some of this information can be found by digging into your sales reports, others necessitate that you stay informed by other means. For instance, the only way for an apparel merchant to know what the next trend will be is to both stay current with taste-makers and fashion trends and have a deep understanding of what their customers like. They can’t rely exclusively on their sales data. 

Use a mix of data, qualitative and anecdotal information from trusted sources when forecasting demand to assure that you’re capturing the full scope of demand. 

 

Forecast demand to improve cash flow 

To maintain cash flow, a retailer needs to know when to reorder a product, how much to order and approximately how long it will take to sell. While some merchants rely on instincts alone, savvy retailers will dig into their sales reports and measure product sell-through, understand industry-wide trends and know what their customers like. 

While it certainly takes more time to do it this way, it can work wonders for cash flow management. Knowing how much to purchase, how fast it will sell and how much they make on each sale enables retailers to predict how much money will come in and out of their retail business with greater accuracy. 

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