ASSORTMENT PLANNING
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Three Reasons to Use a Consumer-Driven Approach
To Manage Product Assortments
Managing product assortments at the shelf is an important task for every consumer goods company. Assortment planning remains a critical component in retail execution. It is the key to satisfying shoppers and maximizing volume.
It is imperative to have the proper assortment at that point of interruption between the product and the consumer. However, so many assortment tools and processes fail to account for and incorporate a critical element - the consumer.
“A robust analytical approach creates in-store product assortments based on actual consumer behavior. It goes beyond traditional practices, providing consumer-driven analysis to help manufacturers and retailers make assortment decisions with greater accuracy and confidence,” says Greg Orth, a director with Henry Rak Consulting Partners (HRCP).
He lists three reasons to use a consumer-driven approach to manage product assortments:
Established Methodologies Outdated Traditional approaches to assortment rely primarily on straight-line trending of item volume and share data, with additional “judgment” and guesswork regarding product substitutability (if done at all). The data used in such methodologies have nothing to do with how consumers actually choose and use the product, or what they are substituting for a certain item.
Getting the right assortment for high-velocity items is the easy part. However, big mistakes can be made at the lower levels when straight velocity measures may delete an item that is highly incremental to the category while a highly cannibalistic item stays on the shelf. In addition, traditional approaches overstate the incremental contribution of additional SKUs. As a result, retailers make critical assortment and merchandising decisions based only on what they ship from the warehouse to their stores, not actual consumer behavior.
Grounded in the Consumer A consumer-guided analytical approach creates accurate, in-store product assortments based on actual consumer usage and shopping patterns. Its consumer-driven approach provides meaningful, fact-based direction, while aligning marketing, sales and the retailer around how the category is organized. This information enables companies to optimize retail SKUs for maximum ROI.
Such approaches employ data regarding consumer use, purchase, velocity, loyalty, and actual switching behavior. This data, derived from a MarketMap, yields a much deeper understanding of consumer behavior. The MarketMap shows:
- Why and how products satisfy consumer purchase and usage occasions
- Why and how consumer preferences dictate loyalty and substitutability
- How these factors affect net volume flows across SKUs within a segment or category.
Being able to understand, and subsequently incorporate, product attributes in the assortment planning process can only be done in an environment based on a market structure. A consumer-driven approach also integrates POS facts that provide the traditional straight-line view of the world: velocity, revenue and distribution trends, along with identification of “new” and “declining” SKUs.
Such an approach ensures that new or emerging segments are treated with equal importance. This consumer-based analysis captures switching of current items within categories in addition to added or deleted items. The approach accounts for consumer preferences at every level of the market structure regarding size, type, form, etc.
Optimize Financial Performance A consumer-driven approach helps improve SKU ROI for the retailer because it incorporates consumer purchase data and provides scenarios to improve financial performance. Assortment decisions and inventories align with consumer purchase and usage, therefore keeping inventories at optimum levels and maximizing turnover. In addition, the approach combines its proprietary consumer database with list price, base price, selling price, cost of goods, and promotion dollars to ensure profitability is optimized for both manufacturer and retailer.
A consumer-driven approach helps improve returns for manufacturers as well. By identifying the most productive and least productive SKUs, it yields the optimal assortment for the highest inventory turnover rate. As a result, margins improve as support for lower volume SKUs are eliminated and consumption-driven promotion becomes the focus.
In sum, the most effective and accurate product mix is possible using a robust analytical approach that incorporates consumers’ actual behavior and delivers the comprehensive solution needed.
For information about HRCP and its consumer-driven assortment approach, MixMaster, visit www.hrcpinsights.com.
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