Debunking the Five Myths of SKU Optimization

Increasing SKU optimization needs to be an ongoing process to get the most productivity out of categories. However, there are several misconceptions that keep store shelves choked with a suboptimal product mix, while “power SKUs” sit on the sidelines.

“Understanding the drivers of SKU optimization helps inform better decisions around brand and SKU optimization to make the category as productive as possible,” says Paul Thompson, managing director, Henry Rak Consulting Partners (HRCP).

He describes the following five myths that manufacturers and retailers need to debunk while seeking the right balance of stock-keeping units:

Myth 1: One Size Fits All
One of the big mistakes made in SKU optimization is not understanding with granularity how the market is organized, specifically the role of brands, sizes, flavors and forms in consumer purchase decisions.

An example is organic soup. It might not have high velocity, but it’s very important to a subset of consumers. If the organic soup products aren’t available, those shoppers are going to leave the store. This leads to lost sales and lost customers.

The way to get a clear understanding of how a category is organized is to have a robust market structure or market map. It gives you the landscape of what product benefits are important to the consumer in the category.

Today there are assortment tools that utilize the underlying consumer switching behavior from the market structure and allow retailers and manufactures to optimize SKUs within each segment of the category based on their objectives for revenue, profit, etc. These tools load in every level of the market map to provide granular detail about how volume transfers among very similar or substitutable products.

Myth 2: Slow-Moving Products Should Be Deleted First
This misconception results from not understanding how incremental products are to the total category. For example, there can be too many brands or sizes that are competing against each other, while not providing true incremental benefit to the category. Once you understand incrementality, you have a better sense for what products you can take out, and still maintain the integrity of the category volume and profit.

Incrementality is related to loyalty — what is the level of loyalty or product substitutability? In the lower levels of the market structure or the market map, products tend to have less incrementality and become much more substitutable. So it is important to understand the impact of removing them from the product mix and where the volume will flow. Products at the higher
level of the structure with more unique benefits tend to have higher incrementality and will have a higher consumer walk rate if removed.

The “walk rate” defines consumer preferences for products and helps the understanding of when shoppers would leave the category based on the product they want not being available, with no likely substitute for it.

The solution is to have a keen sense for what causes consumers to switch. This involves a tool to understand with accuracy the volume flows that result from adding or deleting brands or products at the lowest level of the structure.

Myth 3: Optimize the Total Category
Rather than attempting to optimize the entire category as one big aggregate of products, marketers need to understand each segment and the role of that segment, and then optimize the segments based on their potential to enhance the category.

You need to look at the size of the segments, the number of items that are represented in each segment, and whether they are being leveraged appropriately in terms of the productivity that they bring to a category. There may be certain segments like children's cereals where there are always new products coming in and lots of innovation. But you can sometimes have too many items, and they lose productivity.

The solution is to go back on a routine basis and reexamine each of the segments within the category to make sure you are maximizing productivity. Some of them may be underleveraged, where they have a lot of very productive SKUs, and there is room to add some additional items that will boost the segment’s potential.

There are assortment tools to help define product and segment productivity. You want to get the categories optimized to the level where you’ve got the most productive SKUs driving consumer needs within each segment relative to their importance to the overall category.

Myth 4: Private Label Doesn’t Require the Same Rigor of Analysis
To be true to the assortment process, private label products need to stand the same test of the value they bring to each of the segments – and to the total category – to make sure that they are productive in the mix of products, and relevant to consumer needs.

A lot of times, we see that retailers want to hold their private label products off to the side in optimization, but that only denigrates the category productivity. To do quality assortment analysis, you need to look at the products in totality because private label plays a role, and national brands play a role, and you want to make sure that you are getting the most productive balance.

One example of a category with many new private label products is analgesics where you have lots of new forms and sizes of brands coming to the market, and then the private label versions follow very soon after. Because of the newness of some of these products, people may not be fast adopters of the private label alternative, so those products may not do as well. You need to focus on products with a large consumer base, a large consumer draw, and a clear role for a private label alternative. Some of the niche brands just don’t fill the role as well.

Myth 5: Power SKUs are Easy to Get Right
It is easy to pick the fastest moving SKUs, but they are not always the most productive SKUs relative to the incremental value they bring to the category. To determine a power SKU, it is important to look at volume, growth, loyalty, and profitability. Those are the key drivers of the top SKUs. You can then get tools that will score which are the most productive SKUs or the power SKUs  in the category, so that you can make the right decision on shelf, and optimize the space available.

Shelves often get cluttered with non-value-added items and they choke the space intended for the power SKUs. The result? You are out of stock on the power SKUs, and there is too much inventory of the slower moving SKUs. In the ice cream category, for example, when you are out of stock on vanilla, you are out of stock on ice cream. It’s the driver of the category. You need to make sure that you have good representation of the power SKUs, and understand what the true power SKUs are, based on velocity and incrementality.

For more information, visit www.hrcpinsights.com or contact Paul M. Thompson at pthompson@hcrpinsights.com and 817-416-1759.

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