What Is SKU Proliferation? How To Manage SKU Proliferation

If you sell merchandise online, you know how tough it can be to expand your product catalog. Keeping up with shifting customer expectations and an ever-shorter product life cycle is an uphill battle. And what starts as a well-intentioned effort to offer more choices—new colors, seasonal variations, limited editions—can quickly lead to operational complexity, higher storage costs, and slower order fulfillment if not managed intentionally.

This is stock-keeping unit (SKU) proliferation. It may be necessary for meeting customer demands, but it can also create a backlog of slow-moving products in warehouses and fulfillment centers. Here’s a look at SKU proliferation, with tips for keeping your company’s SKU growth focused and productive.

What is SKU proliferation?

A SKU number is an alphanumeric code, typically eight to 10 characters long, assigned by retailers to identify and track each specific product within their inventory system. SKU proliferation refers to the rapid expansion of a company’s product catalog by adding many new stock-keeping units (SKUs) in new colors, sizes, and variations of existing products. New SKUs can also be entirely new product lines that stand out from anything else that you sell.

SKU proliferation often happens when businesses offer greater variety to attract new customers, respond to market trends, or keep up with competitors. The practice can be both beneficial and risky. 

On the plus side, it allows your business to meet customer demand and differentiate its product range. At the same time, a high SKU count increases operational complexity. You may encounter challenges in inventory management, including carrying costs and unsellable inventory. It’s essential to conduct market research and analyze historical sales data before significantly increasing the number of SKUs you sell to ensure the potential reward is worth the risk.

Causes of SKU proliferation

Why do some businesses significantly scale up their SKU portfolio? In many cases, the reasons relate to consumer behavior and preferences. In others, improved supply chain efficiency makes SKU growth possible. 

Here are some reasons why businesses, especially ecommerce brands, add more SKUs:

• Meeting customer preferences. Businesses add new colors, sizes, materials, or features to appeal to more buyers and capture niche demand.
• Competitive pressure. Companies introduce additional SKUs to keep up with competitors’ assortments or to differentiate their offerings in a crowded market.
• Marketing and merchandising initiatives. Businesses may increase SKUs when launching limited editions, seasonal products, bundles, and promotional variants.
• Expanding into new markets and new sales channels. It’s common for businesses to geographically expand or start selling through new retailers, marketplaces, or wholesale channels. This sometimes requires creating SKUs unique to those outlets.
• Supplier-driven additions. Suppliers may push new styles or variations, leading companies to adopt more SKUs than necessary.
• Freelancing inventory managers. Some organizations lack clear governance from top executives, and individual procurement and inventory managers begin adding SKUs at their own discretion.

Challenges of unintentional SKU proliferation

• Increased operational and storage costs
• Poor inventory life cycle management
• Accumulation of dead stock and slow-moving items
• Inaccurate demand forecasting
• Reduced fulfillment efficiency
• Cash flow strain

If you clog your product catalog with too many SKUs or new variations without a clear strategy, you might face challenges across your supply chain management and inventory control operations. These challenges include:

Increased operational and storage costs

SKU proliferation requires businesses to invest in physical resources. Unless you’re dropshipping, every new SKU demands warehouse space, and more warehouse space costs money. In addition to this storage cost, you can expect more complex management procedures, as well as labor costs associated with picking and packing. Added together, these operational costs eat directly into your margins.

Poor inventory life cycle management

It’s hard for small businesses to effectively manageinventory levels when there are too many SKUs in the system. Critical functions can suffer, including real-time inventory tracking and overall warehouse management. When you push your company’s inventory management system to the brink, stock can linger on the shelves, be lost altogether, or never arrive in the warehouse to begin with.

Accumulation of dead stock and slow-moving items

You need robust inventory turnover to keep SKUs moving out of warehouses and into the arms of your customers. Slow-moving SKUs that eventually sell consume storage space and add to your logistics costs. Moreover, if your sales volume lags, your existing inventory can become spoiled, outdated, or otherwise unsellable. This is known as dead stock, which you’ll have to record as a loss in your financial statements. 

Inaccurate demand forecasting

Forecasting demand is challenging for any ecommerce business. It can become borderline impossible if you stock too many items to accurately assess SKU performance. This is true whether your inventory is made up of many disparate SKUs or myriad product variations within a smaller number of product lines. Inventory planning is almost always easier when there are fewer SKUs to track.

Reduced fulfillment efficiency

When it comes to fulfillment, operational efficiency relies on managing the pick, pack, and ship processes. Too many product offerings can complicate workflows and make it harder for warehouse teams to accomplish their work.

Cash flow strain

Excess stock doesn’t just consume space; it also consumes money. Funds tied up in slow-moving inventory cannot be used elsewhere, especially in small businesses with tight margins. Ironically, some of the capital allocations that might improve inventory management—like creating a cloud-based warehouse management system (WMS)—could be out of reach if you spend too much money acquiring and storing SKUs.

SKU proliferation best practices

• Conduct regular SKU rationalization
• Invest in inventory management software
• Streamline your catalog
• Rely on hard market research
• Embrace delayed differentiation

Effective SKU management is within reach for businesses of all sizes. Here are some ways to keep SKU proliferation in check—and ideally increase sales volume for the SKUs you choose to stock.

Conduct regular SKU rationalization

Use a formal SKU rationalization process to review your entire catalog. The SKU rationalization process exists to assess SKU performance based on profitability, inventory turnover, and contribution to your overall sales volume. Identify the bottom 10% to 20% of underperforming SKUs and flag them for phase-out, discounting existing stock until it’s sold.

Invest in inventory management software

Invest in inventory management software that integrates with your warehouse management system. A combined tech stack provides real-time inventory tracking, improves SKU analysis, and helps you decide how many SKUs need replenishment or removal.

Streamline your catalog

Assess whether new variations or expanded product offerings actually attract more customers or simply lead to excess stock. Simplifying complex catalogs helps reduce warehousing costs and lets you create more targeted marketing campaigns that focus on a smaller number of products.

Rely on hard market research

Before adding products or new variants, mandate that every new SKU must pass a rigorous assessment showing a clear market need. Ideally, these new SKUs should bring in new customers with a promising customer lifetime value (CLV). Setting these standards prevents impulsive product variations and forces your team to decide if the new SKU will reasonably increase sales or merely satisfy niche curiosity.

Embrace delayed differentiation

Rather than add SKUs in bulk, postpone adding product variations until you’ve validated customer demand. For instance, rather than stocking 20 colors of a new product, start with a small number of variants and introduce new ones over time. This reduces the number of unique existing inventory units held in your storage system. If you add more down the line, it’s presumably because you’re responding to customer demand.