What is Sell-Through Rate?
The Sell-Through Rate shows the relationship between the number of units sold and the amount of inventory you hold. It is a measure of how quickly your units are selling out, displayed as a percentage. Sell-through is an indicator of how prepared you are for the demand you are facing and can be used to assess if your investment is returning well.
If your sell-through is too low it can mean your supply is greater than the demand you're facing (overstocked) or you're priced too high. If this rate is too high it can mean you have too little inventory on hand (understocked) or you're priced too low.
Tip: If you're selling out faster than you're able to reorder consider increasing your price or reduce advertising efforts to prevent stocking out.
How to use Sell Through Rate:
This metric is commonly used to compare the sell-through of a specific product from one month to another to examine trends and improve inventory planning.
From a profitability viewpoint, keep in mind the longer a product stays in storage the more money it is costing you, and until those funds are freed you're not able to invest in other areas of your business or purchase merchandise that may move more quickly.
How you analyze your sell-through rate should be reflective of what you’re trying to achieve with the merchandise, for example, a high sell-through rate should indicate its time to replenish your inventory unless your goal is to liquidate the product.
Many other things go into considering how prepared you are to handle demand, such as your gross margins, replenishment lead time (long vs short), and seasonality, but this will give you a general idea.
Number of units sold / ((Begin inventory units + End inventory unit)/2)