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Sell-Through Rate

The amount of inventory that is sold within a given period relative to the amount of inventory received within the same period

What is Sell-Through Rate?

Sell-through rate measures the amount of inventory that is sold within a given period, relative to the amount of inventory received within the same period. Strictly speaking, sell-through rate estimates how quickly a company can sell its inventory, converting it to revenue. Essentially, it is among the most important key performance indicators (KPI) in inventory management. Most notably, it is commonly employed in the retail industry.

 

Sell-Through Rate

 

Sell-Through Rate and Inventory Management

Proper inventory management is always challenging. If a company holds a lot of inventory, it may face problems with selling all the inventory. On the other hand, if a company lacks enough inventory, then it may not be able to cope with the demand from its customers. Thus, a company must maintain a proper balance between its inventory and market trends in order to meet the demand of its customers and minimize its inventory and storage costs. The sell-through rate is a helpful metric that reveals how fast a company is turning over its inventory within a certain period. It can guide the company in making any necessary adjustments to its inventory strategy.

Generally, every company aims to maximize its sell-through rate. A high rate is an indication that a business sells most of its inventory received in a period. Therefore, it does not need to spend a lot of money to stock excess inventory.

Note that the sell-through rate can indicate problems with moving inventory, but it does not reveal the causes of the problems. In addition, note that the retail industry is highly influenced by seasonal trends. Thus, a decline in the company’s sell-through rate may be caused by a seasonal trend.

 

How to Calculate Sell-Through Rate?

Sell-through rate is calculated using the formula below:

 

Sell-Through Rate - Formula

 

Generally, the metric is calculated on a monthly basis.

 

Practical Example

XYZ Store is a local grocery store. Its owner wants to assess the store’s sell-through rate in order to improve inventory management. Last month, the store received 200 units of products from its suppliers. At the same time, the store sold 140 units of its products for a month. The rate can be calculated in the following way:

 

Sell-Through Rate - Example

 

A sell-through rate of 70% is a solid result. However, if the store’s owner wants to increase the figure in the future, he has two options. The first option includes the acceleration of sales. For example, the store may start some promotions to sell more units in the next month. Alternatively, the store may order less from its suppliers, which will also result in a higher sell-through percentage.

 

Related Readings

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

  • Inventory Turnover Ratio
  • LIFO vs. FIFO
  • Operating Cycle
  • Perpetual Inventory System