How To Decide What To Cut

Figuring out what product or products to sunset can be a Sophie’s Choice-like decision for founders, but it’s important to keep emotions out of it and concentrate on the bottom line. Burnett advises looking at whether a SKU is a top 20% revenue driver, i.e., whether it accounts for 80% of the brand’s revenue. If it doesn’t fall into that category, consider putting it on the chopping block.

Rose Fernandez, beauty executive and strategic consultant for Cosmo Innovation Group, co-signs Burnett’s 80% rule. She advises next looking at whether lower-performing SKUs deliver strong margins as well as their turnover rate. Fernandez and Burnett both recommend weighing supply chain requirements like packaging and shipping costs. If it’s very expensive to make, then consider eliminating it.

Fernandez says, “What are the MOQs on those SKUs? Every time you go to do a run, are you having to buy more than a year’s worth of inventory? Those are all considerations because if something’s going to sit and expire and just tie up capital, then that’s a SKU that needs to go away.”

Finance and strategy executive Chris Vernicek created a SKU rationalization framework that directs founders to develop a matrix plotting SKUs by gross margin, from low to high, and velocity, from slow-moving to fast-moving. In the matrix, which he outlined on LinkedIn, he labels products with high margin and high velocity as stars and determines they should be kept in the lineup and protected at all costs.

If a SKU is high margin but slow-moving, it’s considered a cash cow and may need a marketing push. If a product is low margin and high velocity, founders should watch it closely and ensure it doesn’t overshadow the stars. Low-margin, low-velocity SKUs are dead weight and should be cut because they’re bleeding working capital and warehouse space and unnecessarily compounding complexity.

Laura Chisholm, founder of LTC Beauty Consulting Group, believes brands should consider ranking and profit contribution by channel. If a brand is stocked at Amazon, Ulta and runs its own direct-to-consumer channel, and a SKU ranks near the bottom across all three, that’s a strong signal it should be cut. Before eliminating a product altogether, however, Chisholm advises evaluating other factors like whether a product is a heritage SKU, important to storytelling or one that increases overall basket size.

How To Wind Down SKUs

The SKU wind-down process should be mapped out in advance using data and sell-through rates versus a reactive clearance. Chisholm counsels brands to build inventory sell-through into their annual calendar and use tentpole moments like holidays or major promotional events as a way to work through inventory. Bundling with core, replenishable SKUs is another approach. The objective is to phase out SKUs as seamlessly as possible.

Burnett recommends running a special promotion around the SKU being cut. She throws out 20% as a starting discount, but notes that the percentage will vary depending on how much inventory is left and how fast the founder wants to work through it. For prestige brands, she doesn’t typically recommend a discount greater than 20%, although she acknowledges that some brands may go up to 50%.

Chisolm stresses that discounting should be strategic and channel-specific. DTC should be used to maximize margin and control through targeted offers and bundling, Amazon to drive selective, event-based velocity, and retail to support planned sell-through and new merchandising sets. She says: “The strongest brands don’t reactively discount, they build exit strategy into their annual planning from the start to help maintain margins and brand equity as they clear out excess inventory.”

Fernandez points out that selling discontinued products at off-price retailers such as T.J. Maxx, Ross or Gilt.com, particularly if the products are being replaced, is an option to work through inventory. She caveats, “Off-price does trade at a much lower margin, so it is recommended that the brand first manage the timing of discontinued product inventory through phase out and site promo.”

How To Announce SKU Cuts

Burnett recommends letting customers know the brand will be winding down a product four to six weeks in advance. She suggests sending multiple reminder emails so that customers have the opportunity to stock up. “Give them a solid lead time,” she says. “You don’t want to just delete it.”

She adds that email and social media language should be intentional and explain how the streamlining positively impacts the customer. Some wording might include, “Hey, we’re refining our collection to focus on the products that our customers love the most.” Or, “We want to focus on the products that are going to best serve you and the transformation that you’re after.”

Chisholm agrees that leading with transparency and informing customers of the change via social media and email helps build trust. She also recommends having a backup product in place. For example, if it’s a neutral-toned liner that’s being cut, direct customers to a similarly colored option.

Fernandez has a different view on announcing SKU rationalization, contending it’s often unnecessary. She says, “If something is being discontinued, it’s because it doesn’t sell, so it should go away quietly.”

Lo and Thompson went the silent cut route for Three Ships, noting that the products being discontinued only sold a couple of hundred units a month. If the SKUs were stronger, Thompson says the brand would’ve notified customers. She elaborates, “If it’s something where it’s low performing, low impact, doesn’t align with the level that you’re taking your brand in, I would just cut them pretty ruthlessly and not really pay it too much attention.”

The brand is weighing whether to cut a stronger performer, its third best-selling cream, and is using the consideration as an opportunity to gather data. It’s asking customers questions like would they want to know in advance? Would they switch over to another Three Ships product? What did they like about the formula?

How To Notify Retailers

Burnett suggests alerting big-box retailers six months to a year before exiting SKUs and boutiques three to five months in advance. Chisholm concurs with the six-month to one-year timeline and notes that it’s best practice to inform retail partners during market meetings. She says, “Surprises will only hurt you.”

Fernandez has never seen retailers be distressed by SKU rationalization, underscoring that they’re trying to maximize productivity and slow-moving SKUs aren’t aligned with that motivation. In fact, she believes retailers may be impressed by brands’ initiative to make cuts.

Three Ships’ retail partners reacted positively when Lo informed them the brand would be eliminating slow-moving SKUs. She recounts, “They said, ‘Hey, it’s really refreshing to hear from a brand that you are proactively putting up your hand and saying, “This product is not working for us, and it’s probably not working for you from our sales data. Let’s proactively remove this from your assortment and RTV any units that aren’t selling so we can support the bestsellers in store and make room for new innovation that makes more sense.”’”

Lo continues, “A buyer’s most critical resource is their time, so if you are doing your job as the vendor or account manager by putting up your hand and pointing out things that aren’t working, they actually prefer that over you pretending that everything’s working out.”

How To Apply Lessons From SKU Rationalization

After SKU rationalization, Chisholm recommends brands assess why products didn’t work to inform future product development. She suggests asking questions like how did we launch it? Did it fulfill its purpose? Was it a trend SKU? Was it too close to another color or product we already have? She says, “Team insights are crucial.”

Following SKU rationalization, assessing the cadence of future launches is important, too. Fernandez concludes that brands should move away from cluttered launch schedules and instead double down on hero-SKU strategies. “You can build a brand on your hero SKUs or you can focus much longer on a launch than you had in the past,” she says. “I think the days of needing to have seven different franchises with five to seven SKUs have been gone for a very long time.”

Brands should keep in mind that a discontinued product doesn’t have to disappear forever. Burnett recalls a client with a novel product that wasn’t conducive to production at scale. She recommended making it a specialty limited-edition SKU released during holidays or anniversaries. Burnett says, “You can bring it back for the OGs.”