SKU Proliferation

What is SKU Proliferation?

SKU proliferation is the practice of increasing the number of product variations — known as stock-keeping units (SKUs) — in a company’s inventory. It can either be deliberate (introducing new product variations to cater to different customer needs) or unintentional (resulting from poor inventory management).

SKUs are unique codes used to identify, characterize, and track individual products within a company’s inventory management system. They could indicate different models, sizes, colors, flavors, or any other distinguishing characteristic of a product.

Increasing the SKU count is a common strategy when retailers and manufacturers want to capitalize on the popularity of certain items. For example, a company might introduce multiple color variants or feature sets of a popular product to attract different consumer segments.

Synonyms for SKU Proliferation

  • Assortment extension
  • Product diversification
  • Product line expansion
  • SKU count inflation
  • SKU growth

Reasons for SKU Proliferation

While there are plenty of strategic reasons to increase the number of products in a company’s portfolio, the main drivers for intentional SKU proliferation are usually sales, technology, consumer behavior, and competition.

There are also several causes of unintentional SKU proliferation. When businesses don’t effectively manage the inventory lifecycle or have trouble moving stock, products can accumulate and lead to an inflated SKU count.

Let’s look at these factors in more detail:

Strategic Reasons to Increase SKU Count

Meet increased customer demand

Companies often introduce new product variations in response to popular trends or customer demand.

This could involve:

  • Adding new features based on feedback
  • Introducing highly requested sizes, colors, flavor options, etc.
  • Creating a new product or variant in response to a social media trend or viral product
  • Surveying customers to gauge their interest in new variations

In cases like these, the demand is already proven. There may be traction on social media for a particular product, or people may have been asking for a specific size, color, or feature, and the company is responding to that demand by introducing new SKUs.

A notable example of this is Apple’s development of the iPhone 6 Plus. Recognizing a growing consumer appetite for larger smartphone screens — a trend popularized by competitors in the Android space — Apple introduced the “Plus” version alongside that year’s new iPhone.

Add variety to already-successful products

With some products, “if it ain’t broke, don’t fix it” doesn’t apply. In this situation, companies can increase the SKU count by introducing new variations of already successful products to keep things fresh and attract more customers.

For example:

  • Releasing limited edition collections or colorways
  • Offering seasonal flavors or designs
  • Collaborating with popular brands or influencers
  • Offering regional variations of a product

These tactics drive hype and urgency while keeping customers engaged and interested in the product, even if it’s been around for a while.

Capture a larger market share

A company may expand its product catalog to appeal to niche audiences or address the needs of a particular group of people. Or, they might introduce new SKUs to cater to different demographics or geographical markets.

For instance, a company that has traditionally focused on one region may explore opportunities in new territories with different consumer preferences and needs. By adding SKUs, they can either capitalize on untapped demand or create new demand for their products in these markets.

Reflect new technological advancements

For businesses in the technology space, SKU proliferation is guaranteed simply because new technology emerges and evolves at an unprecedented pace. In addition to varying sizes, feature levels, memory capacities, etc., TVs, smartphones, laptops, and other tech gadgets need to continuously keep up with the latest software, hardware, and compatibility standards.

But it’s not just tech companies that benefit from this strategy. Brands in the food and beverage industry, for example, often introduce new flavors or packaging to appeal to changing consumer tastes and lifestyles.

In any case, these companies still have their older models available. So, the total number of SKUs they have to manage increases.

Unintentional Causes of SKU Proliferation

Lack of inventory management tools and processes

Perhaps the most significant reason for unintentional SKU proliferation is a lack of proper inventory management tools and processes. Companies that don’t have an enterprise resource planning (ERP) or inventory management solution in place to monitor inventory levels and sales data often end up with excess stock they can’t move.

Poor stock rotation and management

It’s common for businesses to prioritize selling new products or those that are in high demand, forgetting about the older ones. Difficulty in removing slow-selling SKUs leads to a build-up of inventory that eventually needs to be discounted or written off.

Overstocking due to inaccurate demand forecasting

Adding new variants to a product line or expanding into new markets requires a solid understanding of current and future consumer demand. When a business’s data is off, it risks overproducing products that end up flopping, causing its total number of SKUs to proliferate.

Inaccurate data and poor communication across departments

When customer-facing sales, marketing, and customer success teams don’t communicate with inventory and supply chain teams, or don’t have access to the same data and insights, the need for new SKUs can easily be misrepresented.

For example, if sales and marketing teams are not aware of a new product or variation that’s in the works, they may not emphasize it to customers, leading to a lack of demand and the perception that there’s no need for the new SKU. Conversely, if inventory teams don’t understand why sales are low or high on certain products, they may push for additional SKUs without knowing the full picture.

Challenges of SKU Growth

While SKU proliferation can lead to increased revenue opportunities by catering to varied consumer demands and enabling competitive differentiation, it also comes with significant drawbacks. Managing a larger number of SKUs increases operational complexity, involving higher manufacturing, storage, and administrative costs.

Challenges that follow include:

  • Higher storage space requirements and carrying costs
  • Greater complexity in inventory management and order fulfillment
  • Risk of dead stock, write-offs, and overstocking/understocking
  • Difficulties with pricing and managing profit margins
  • Additional demands on supply chain and logistics
  • Higher risks of errors and discrepancies in product listings, labeling, and packaging
  • Potential negative impact on the brand if new SKUs fail or cannibalize sales of existing ones

These difficulties are particularly challenging for small businesses and startups that need to increase their product depth or breadth to scale but don’t have the resources of larger companies.

SKU Proliferation Solutions

Despite its challenges, SKU proliferation doesn’t have to be a bad thing. To prevent its potential negative effects, there are several measures businesses can implement:

Introduce new SKUs strategically and gradually.

The most important thing to remember is that adding new SKUs should align with your overall business strategy and goals. It’s not just about chasing trends or trying to keep up with competitors; it’s about understanding what will truly drive value for your customers and your company.

Perform market research, understand customer pain points, and listen to their needs (and how a new product could meet them). Then, assess the potential ROI of introducing that product/variant before committing to it.

If you want to capitalize on a trend that’s happening right this second, consider how that trend ties back to your existing product offerings and what enhancements can be made. This approach helps minimize the risk of cannibalization.

Perform ABC analysis.

The ABC analysis is a method used for inventory categorization. It’s based on the Pareto principle (a.k.a. the 80/20 Rule), which suggests that 20% of your products generate 80% of your sales.

  • A items are high-value products that represent a large chunk of your sales (usually ~80%) but a comparatively small part of your inventory (~20%).
  • B items are moderate-value products, representing ~15% of your sales but ~30% of your inventory.
  • C items comprise the bulk of your inventory, but generate only ~5% of your sales.

While your core (A) items should remain consistently available (and therefore require tight inventory controls), you may want to consider discontinuing C items (unless they’re necessary to boost the sales of your A items). Alternatively, you can relegate them to a lower priority and adjust inventory levels accordingly.

It’s worth mentioning some C items will only be available for a limited time. If you’re releasing a limited edition or seasonal product, it’s okay to have a high inventory level at first since you know demand will be short-lived.

Eliminate redundancies in product lines.

Offering multiple products that are too similar can confuse customers. While product cannibalization isn’t always bad (e.g., if you want to phase out an old product version), customers might struggle to differentiate between the two or find a compelling reason to choose one over the other.

Product differentiation is the key word here. Every product in your lineup should have a unique selling point and offer something different from the others. An example of two redundant products would be “Volumizing Shampoo A” and “Extra Body Shampoo B,” where both products contain similar active ingredients and promise to increase hair thickness and fullness.

Take a modular approach to product design.

Modularity means designing a range of products in a way that facilitates customization and scalability. By creating modular components, businesses can offer customers more choices without having to create entirely new products. This approach also streamlines manufacturing and supply chain processes because parts or modules are interchangeable.

Examples of modular products include:

  • Smartphones and laptops that allow for different specifications (storage, memory, processor)
  • Cars with customizable features (interior color, navigation system)
  • Build-your-own furniture or meal kits.

Offering modularity addresses the business need to fulfill customer demand without placing too much additional stress on the supply chain and production processes or compromising fulfillment efficiency.

Establish clear criteria for adding to the product mix.

Before introducing a new SKU, make sure it meets certain criteria. Some questions to ask include:

  • Does this product solve a problem for our customers?
  • Will it complement or enhance existing products?
  • Do we have proof there’s demand for this product on a smaller scale?
  • Can we realistically manage the production and supply of this product alongside the others in our lineup?

Although some level of risk is always present when releasing a new product, setting guidelines and validating products before a large-scale launch can help mitigate that risk and prevent unnecessary SKUs from being added. 

Review and optimize inventory levels throughout the year.

SKU rationalization is a critical part of inventory management that involves continuously evaluating and optimizing the number of SKUs a business carries.

The steps to perform SKU rationalization are as follows:

  • Define business goals and target audience.
  • Pull sales, profitability, production cost, storage costs, and inventory data for each SKU.
  • Categorize SKUs based on performance (good, bad, stagnant).
  • Evaluate non-performance factors (e.g., seasonality, cultural presence, loyalty).
  • Determine which SKUs to keep, discontinue, and optimize.

The frequency with which a business carries out the SKU rationalization process depends upon its size, product lifecycle, and sales patterns. If it has seasonal or time-sensitive products, SKU rationalization will have to occur more frequently.

SKU Management Best Practices

While some may view SKU proliferation as a necessary strategy for growth, it carries significant negative consequences when a business fails to manage it properly.

Follow these tips to maximize efficiency and profitability while growing your product library:

Track inventory using a warehouse management system (WMS).

C-level leaders need to embrace change. And a big part of “change” is investing in advanced tools that make inventory management more efficient and accurate.

While practically all enterprise-level retailers and manufacturers use some sort of inventory management software, nearly half (43%) of small businesses either don’t track their inventory at all or use a manual process to do so.

A WMS can help businesses of all sizes set up real-time inventory tracking, set up automated reorder triggers, and track sales data per item. It also streamlines the process of SKU rationalization and ensures businesses stay on top of their product mix at all times.

Use AI and predictive analytics to forecast demand.

There are plenty of ways businesses can supercharge revenue growth with AI. Using it to run advanced qualitative and quantitative forecasting models is among the most impactful.

AI can integrate with your sales channels and current inventory data to help you analyze historical sales, assess market trends, and predict future consumer behavior. They can use this information to guide inventory decisions (e.g., which SKUs to order more of, add, and discontinue) based on what’s likely to drive profits.

Negotiate favorable bulk discount terms with suppliers.

Without making any changes to your business model or tech stack, you can probably reduce costs by negotiating a better deal with your suppliers. That includes asking for price breaks or a special pricing agreement based on order volume and timing.

As an example, let’s say you order 1,000 units of SKU 12345 every month. Demand for this product is consistent and will likely continue for the foreseeable future. Would your supplier offer a 10% discount on orders of 2,000 units or more? If so, it’s worth calculating the excess carrying costs (e.g., storage, insurance) against the potential savings.

Optimize your warehouse layout.

There are two reasons to do this:

  • Efficient picking and packing
  • To maximize storage space

If your warehouse layout is haphazard or chaotic, you’re likely spending more on labor costs (i.e., time to find and retrieve items) and storage equipment than you should be.

There are a few common warehouse layouts:

  • U-shaped layout (shipping and receiving docks placed next to each other)
  • I-shaped layout (shipping and receiving docks are at opposite ends)
  • L-shape layout (shipping dock is at the end of one side; receiving dock is at the corner of another)

While U-shaped layouts are the most common, the most appropriate layout for your business depends on factors like warehouse size and the nature of your inventory. For example, an I-shaped warehouse works best for high-volume storage because it minimizes travel between dock and storage areas.

Pinpoint slow-moving items using sales data.

You can use information from your ecommerce site (and retail stores if you have any) to make decisions about product ordering, merchandising, and promotion.

For starters, consider pulling a report that shows which SKUs are still in stock after a predetermined period (e.g., six months). Then, compare those results to other SKUs that have shorter lifecycles or sell faster.

If there’s an SKU that has barely sold compared to others and required frequent markdowns or promotions to move off the shelf, it may be worth discontinuing.

People Also Ask

Is SKU proliferation always bad?

Not necessarily. While excessive SKU proliferation can lead to higher inventory costs and decreased efficiency, strategically expanding a product line can also drive growth and profitability. In fact, it’s normally a necessity for businesses as they evolve and enter new markets.

Is SKU rationalization the opposite of SKU proliferation?

SKU rationalization is the process of reducing or eliminating underperforming or redundant SKUs to improve inventory management and reduce costs. If SKU proliferation is intentional, it’s the opposite of this — the deliberate expansion of product variations to attract more customers and increase sales.