When it comes to growth for durable goods manufacturers and retailers, continuous optimization of store inventory and product lines is essential. One proven method of improving inventory management and enabling growth is through SKU rationalization.  

In this article we take a look at the benefits of SKU rationalization and strategies for implementing – including TraQline’s 80/20 rule of SKU rationalization.  

What is SKU Rationalization? 

Simply put, SKU rationalization is the business process of streamlining product lines by determining what products are performing well and which need discontinued.  

This process is heavily data-driven and involves looking at sales data and other performance metrics to determine overall profitability. Armed with this data, business can streamline product lines to avoid self-cannibalizing SKUs, evaluate why certain SKUs aren’t performing as well as others, stop production on underperforming models, and focus on amplifying SKUs that are meeting market demand. 

Examples of the data that can be used in SKU rationalization processes include but are not limited to: 

1. Market performance – how is a particular SKU selling at top retailers? 
2. Feature insights – does this SKU have all the same features and functionality as the SKUs that are selling well?  
3. Price gap analysis – has this SKU been priced in the same range as similar models? 

The Benefits of SKU Rationalization 

With countless product lines and models available, sorting through the mass of data can be time consuming and overwhelming. SKU rationalization helps to keep SKU count to a minimum, weeding out those that aren’t bringing value to the business.  

Specific benefits of SKU rationalization include but are certainly not limited to:  

• Improving inventory management 
• Reducing inventory costs 
• Increasing profitability 
• Defending against competitive threats 
• Optimizing online & in-store product placement 
• Strengthening brand awareness 
• Boosting product line review success 

How to Implement a SKU Rationalization Strategy 

Implementing an effective SKU rationalization strategy requires 1) comprehensive understanding of your current processes, 2) in-depth evaluation of market data, 3) updates to products and practices, and 4) continuous optimization. 

To break that down, here are the steps that your business should take when starting your SKU rationalization process. 

Understand your current processes 

1. Evaluate marketing and sales tactics. Understanding what messaging and products you’re pushing to which audience is critical. As you move forward in your planning, this groundwork can help you evaluate if a product is failing because of design, features, etc. or if the positioning and placement might have been off given target market.  

Evaluate your products and market  

2. Update your competitive product master. This step is critical in organizing and preparing to evaluate your SKUs against one another, as well as the competition. A comprehensive product library will allow you to see all the features, pricing, and other attributes of all the SKUs across your product line. 
   
   Software like SKU Metrix will compile this information for you, delivering easy side-by-side comparison, providing quick links to major retailer websites, and potentially saving your business hundreds of hours. 

3. Review market data: recent sales, consumer insights, share split, etc. 
   This is where you will uncover how your SKUs are performing within the  market, what your target audiences think of your product line (through consumer surveys, online reviews, or consumer insights tools like Durable IQ), and how much of the market your competitors own. 
   
   Understanding recent sales data and competitive advantages is vital to effective SKU rationalization because it will help you to evaluate – using your compiled product library and product information – what is or is not performing. Meanwhile, competitive data can give you insight into where you have a product gap and consumer data can help you determine what the market wants in a product. 

[Read more about competitive analysis strategies] 

Update product lines and business goals 

4. Recategorize product lines 
   Based on the prior three steps, this is where you will begin to reorganize and streamline your SKUs. Are there areas you can cut SKUs for underperforming or lack of market demand? Are there SKUs that cover the same ground as another, allowing for production to be cut off and eliminate product cannibalization?  
   
   With the answer to these and similar questions, you will be able to put SKUs into a few categories such as: continue, undetermined, cancel, and upcoming. 

5. Project sales cannibalization and switching rates 
   Once you have categorized your SKUs and begun to act on these new categories, you will want to evaluate where your remaining SKUs might cannibalize one another and where you might lose share if a customer switches to a competitor due to a canceled product line. Both of these will note SKUs/lines to watch and provide a starting ground for your next round of  SKU rationalization 

6. Update business goals 
   Additionally, you will want to evaluate overall goals and adjust accordingly. A big part of this will be looking at financial projections and ensuring that any new product development or discontinuations are accounted for, as well as new marketing spend for any products that will be more heavily pushed, etc.  

Maintain regular SKU rationalization practices  

7. Continuously review and optimize strategies based on these steps. 
   Finally, the key to truly effective SKU rationalization is to not stop with one round of evaluation and optimization. This process is ongoing and cyclical and should be completed no more less than every six months. Notably, once processes are in place and the first round of SKU rationalization is complete, iterating should be more straight-forward. 

What is the 80/20 Rule for SKU Rationalization? 

In a general sense, an 80/20 rule states that in any business practice, 80% of results are caused by 20% of all effort. Let’s look at how this applies to SKU rationalization.  

TraQline’s 80/20 rule for SKU Rationalization 

Operating on the principle that 80% of sales are generated by 20% volume, when thinking about your SKU rationalization process, you want to operate under the same basis. 

Upon analyzing your top SKUs and deciding which SKUs to adjust or recategorize, don’t implement changes within the 20% of top performing models. Those 20% show where your greatest consumer interest remains. Adjust and recategorize instead within the other 80%.  

Furthermore, look at your competitive set and use that data to optimize your lower 80% of SKUs. Meaning figure out what’s in the top 20% of SKUs for your competitors, and how that set is different from your top 20%. Once you’ve identified those gaps and opportunities, change your lower 80% to match and compete with the competitors top 20%.  

TraQline: How Durables Businesses Track SKU Performance 

If you’re ready to start streamlining and optimizing your SKUs toward better business practices, TraQline delivers the SKU intelligence you need.

Hybrid POS is a SKU performance analytics platform, used by businesses to understand what SKUs are winning the market, what features are driving sales, how their product mix aligns with demand, and more. SKU Metrix is the industry’s first comprehensive product library, which delivers competitive intelligence and easy comparisons for durables SKUs.  

To learn more about our SKU data, contact us below.