SKU Rationalization

What is SKU Rationalization?

SKU rationalization is the process of analyzing your product portfolio to identify which stock-keeping units (SKUs) deliver value and which create unnecessary complexity. The goal is to optimize your catalog by keeping products that drive profitability and strategic value while eliminating underperformers that drain resources.

For SaaS companies, this applies to pricing tiers and feature packages. A business might start with three clear pricing tiers but gradually accumulate dozens of legacy plans, regional variations, and custom packages. Each variation requires billing configuration, documentation, and support resources. SKU rationalization helps you identify which offerings actually serve your business goals and customers.

Why It Matters

Product proliferation carries hidden costs that compound quickly. Each additional SKU requires inventory investment, warehouse space, and operational overhead. For subscription businesses, every pricing tier needs billing rules, entitlement management, and renewal workflows in your revenue system.

The complexity affects multiple areas:

Working Capital
Underperforming products tie up cash in slow-moving inventory. Physical goods that sit for months represent frozen capital that could fund growth elsewhere.

Operational Burden
Managing hundreds of SKUs requires forecasting, tracking, and coordination across teams. Each product variation multiplies the complexity of your operations.

Customer Experience
Too many options create decision paralysis. Customers faced with dozens of similar choices often defer purchasing rather than risk choosing wrong.

For subscription businesses, billing systems like Meteroid help track which pricing tiers actually convert and retain customers, making it easier to identify rationalization opportunities.

How SKU Rationalization Works

Analyze Performance

Start by evaluating each SKU across key dimensions:

Financial Performance

• Revenue contribution

• Gross margins after all costs

• Profitability including allocated overhead

• Working capital requirements

Operational Metrics

• Inventory turnover rates

• Storage and handling costs

• Order fulfillment complexity

• Return and warranty rates

Strategic Value

• Customer acquisition role

• Competitive positioning

• Cross-sell and upsell potential

• Long-term market positioning

Classify Your Portfolio

Group SKUs by performance and strategic importance:

High performers: Strong financials and strategic fit. Keep and potentially expand.

Strategic keepers: Lower financial performance but serve important purposes like customer acquisition or competitive defense. Evaluate if benefits justify costs.

Underperformers: Poor financials without strategic justification. Prime candidates for elimination.

Question marks: Mixed signals requiring deeper analysis. Set performance thresholds and timelines.

Make Decisions

For products targeted for removal, choose an approach:

Phased discontinuation: Stop promoting the SKU while letting existing inventory deplete naturally. This minimizes disruption and waste.

Active liquidation: Bundle with popular items or discount aggressively to clear inventory quickly.

Product consolidation: Merge similar SKUs into fewer variations that serve the same customer needs.

For SaaS businesses, this often means migrating customers from legacy plans to simplified tiers, which requires careful communication and sometimes grandfather clauses.

Implementation Considerations

Get Cross-Functional Input

Sales teams know which products customers request and which combinations sell together. Operations teams understand the true costs of handling different SKUs. Finance can quantify the working capital impact. Gather perspectives before making cuts.

Handle Existing Commitments

Physical products require inventory rundown strategies. Subscription businesses need migration plans for customers on discontinued tiers. Some customers may need grandfathering on current plans while new sales move to simplified options.

Set Governance Rules

Without ongoing discipline, SKU count creeps back up. Establish clear criteria for adding new products. Require business cases that quantify expected performance. Schedule regular reviews to identify new underperformers.

For subscription pricing, your billing system should make it easy to track tier performance and test new structures without creating permanent complexity.

Common Challenges

Resistance from Sales
Sales teams often defend every SKU because some customer somewhere likes it. Counter this by quantifying the true cost of maintaining each product and setting minimum performance thresholds.

Insufficient Data
Perfect data doesn't exist. Make decisions based on the information you have rather than delaying indefinitely. The cost of continued complexity often exceeds the risk of imperfect choices.

Product Interdependencies
Some SKUs exist primarily to enable others. A low-margin accessory might drive sales of high-margin core products. Map these relationships before eliminating products that play supporting roles.

Customer Disruption
Changes to product availability require communication. For subscription businesses, pricing changes affect existing customers who budgeted based on current plans. Handle transitions carefully to minimize churn.

When to Rationalize

SKU rationalization makes sense when:

• Product count has grown significantly without proportional revenue increases

• Operational complexity is affecting fulfillment speed or accuracy

• Working capital is constrained by slow-moving inventory

• Customers report confusion about product differences

• New systems or processes require product data migration

For subscription businesses, rationalization often coincides with billing system changes or pricing strategy updates. Modern usage-based billing platforms make it easier to reduce pricing tier count while still accommodating different customer needs through metered features.

Annual reviews help prevent proliferation from recurring. Build SKU evaluation into your regular planning cycle rather than treating it as a one-time project.