SKU’s - the more the merrier Internet Marketing for Internet Retail : The Preston Blog

SKU’s - the more the merrier

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Any internet retailer probably knows that a SKU is a “Stock Keeping Unit.” In the world of internet commerce the term usually refers to a product available for purchase on their site. So if a retailer has 500 SKU’s, for example, they sell about 500 different products. Sometimes the differences between two different products may be very slight yet they are still considered different SKU’s. An example of this is Sewell’s line of USB cables - we have each type of cable in many different lengths with are considered different SKU’s.I have met a lot of very small retailers who have between one and fifty different SKU’s. I hear the same thing from most of these retailers - they have a line of products that sells especially well so they don’t want to tie up capital and deal with the headaches that come with a more comprehensive product line. While this strategy may work well in some industries I definitely recommend that anybody wishing to build a solid business on the internet try to beef up their product line.It is not always expensive to add additional SKU’sAt Search Engine Strategies we were presented with the statistic that the average internet retailer stocks 49% of their product line. The other 51% is drop-shipped from somebody else’s inventory. In other words, the retailer takes payment for the merchandise and calls their distributor (or automates this with an XML feed) and places an order for the part. The distributor ships the product to the end-user but makes it appear as if it had actually shipped from the retailer - for this reason drop-shipping is also commonly referred to as blind-shipping. If you have bought many products online chances are that you have received a drop-shipment without realizing it.Overhead does not necessarily rise proportional to additional revenue associated with more SKU’sA lot of people assume that if they are selling $50K of merchandise per month with $20K in overhead that on $100K in revenue they will average $40K in overhead. This is not always (and seldom is) the case. There are two reasons for this - first, if you take a drop-ship approach, your marginal fulfillment costs will fall dramatically because you don’t need to pay someone to package the products, print out shipping labels and make sure the products are shipped by the deadline. The other efficiency gain you will see if you do choose to stock the additional inventory is called economies of scale - as your volume goes up and employees can specialize, the incremental cost of fulfilling an order goes down. This is basic economics.Amazon is a great exampleThe largest internet retailer in the world, Amazon, illustrates this point perfectly. They have over ten million SKU’s available for purchase (source: Internet Retailer). Note that they don’t stock anywhere near this many products - read my post “Why I don’t like Amazon Anymore” for a quick explanation on how different internet retailers sell products on Amazon. Last year Amazon posted sales of $6.9 billion dollars (source: Hoover’s) on over ten million available products for purchase. For simplicity’s sake let’s assume that Amazon had exactly ten million products available.So doing simple math you can figure out that the average SKU generated about $690 per year in revenue. Now take into account very high volume products, such as the Harry Potter series or Lord of the Rings’ DVD’s, which generate several million dollars in revenue for Amazon, and it is obvious that they offer many products which sell very little (or not at all) within a given year. They have not become the largest retailer in the world by exploiting every product they offer - they have become the largest by offering more than anyone else.Depth of the product line is (more) important for niche retailersI presented this argument to a friend the other day who is involved in a lot of small retail startups and he disagreed with me because he thinks the depth of the product offering is not important to a niche retailer who is just going after a small segment of the market. I definitely think this is wrong - the depth of your offering is more important if you are a niche retailer because people expect a specialized retailer to have everything under the sun related to their specialty. Sometimes the smallest iterations of products that are otherwise similar add value to different customers.To illustrate this point I will draw from my experience with Sewell - when we used to add new products similar to products we already carried we worried about cannibalization (new products stealing sales from existing products). Empirically this rarely happens - typically customers know what they’re looking for and as a result our sales typically remain steady for existing products but we convert some customers that would not have bought otherwise. I don’t know an internet retailer that wouldn’t be happy with a bump in their conversion rate which usually happens when they add complementing products, or SKU’s, to their product line.Adding SKU’s helps SEO efforts as wellIf you have one page about a certain product then the search engines generally recognize that and you can generally do well on niche terms (aka “tail terms”) for that product. If you have ten pages about similar products then you have a better chance of the engines thinking you are an authority on that subject and rewarding you with higher rankings on broad terms. Amazon comes up high on many search terms because they may have hundreds of thousands of products in certain categories. The more pages of information you have on any topic the more likely you will be to gain credibility with the search engines on terms related to the topic. As a side note I definitely recommend that you cross-promote products on your site, especially products related to each other.This post is a bit longer then I normally write but I think it is important for any internet retailer to understand that typically when it comes to SKU’s you are better off having more than less. Over time this also creates a barrier to entry to potential competitors - if you are selling everything under the sun related to your industry then a potential competitor would think twice before going head-to-head with you in the market unless they have some perceived competitive advantage. On this note I invite you to keep an eye on Sewell and see what kind of products we add to the store over the next few months

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SKU’s - the more the merrier

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