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“This Sells with that” for Aftermarket Parts
The SKUs (stock keeping units) in an aftermarket business is nothing but the various components of an automobile, tractor or backhoe. Every new model that comes into the market sees an addition of 2,500-3,000 parts to the existing master list, while the addition of every variant adds another 500-1,500 parts. The last forty years has seen a phenomenal growth in the number of aftermarket parts. This phenomenal growth has been fuelled by the liberalization of global players resulting in thousands of models of cars, tractors and other machines.
Frequent launch of new models has reduced product life cycle and has negative implication on the aftermarket supply chain. The implication of shorter life cycle of automobiles on the aftermarket business is faster transition of parts from runners to repeaters and soon fading into obsolescence. The revenue from parts of a new model are typically low in the first two years after launch, increasing in the third and fourth years. The sales only stabilize if the model continues in the market. Unlike other businesses where a product is discontinued if it does not yield revenue, in an aftermarket parts business the part needs to be supplied even if the model has failed. This tremendous volatility impacts the number of parts the aftermarket business has to support.
For example, if an OEM introduces a new model and two variants each year – this results in about 3,000 parts. In six years time the parts proliferation in the aftermarket business of this OEM will be least 30,000 parts. This explains the relevance of having a SKU management for the aftermarket business in order to track the movement of parts till it reaches obsolescence.
Levering “this sells with that” Intelligence from Invoices
The challenges due to inventory and assortment planning for the aftermarket parts are significant. Traditional forecasting methods that treat each part as an independent entity are outdated. For aftermarket parts, the performance of traditional forecasting methods is dismal, and hence not all the parts can be forecasted. In fact, only five percent of the master list can be forecasted with an accuracy of 75 percent on a monthly basis. This results in bloated inventory, incorrect parts assortment and lost sales.
OEMs, distributors and retailer have realized the importance and complexities of the spares business and have initiated measures for assortment planning and SKU management. This requires sustainable methods as the market grows and competition gets fiercer. Every OEM has mentioned how the downturn has reflected in increased sales for the aftermarket/service parts. A part of the business that was typically ‘a nice to have’ has become a focus for improved customer service and profit.
"This Sells With That" For Aftermarket Parts
The aftermarket business deals with SKUs in tens of thousands. Unlike soft goods, in this business customers buy parts for projects and jobs. The invoices reflect that, and are comprised of parts bought by maintenance and repair shops to get a job done. Hence, the affinities in the sales transactions reveal what parts that are bought together for repairs/jobs.
The sales transaction data for the aftermarket businesses is very rich with parts affinities and trends. That’s because the data reflects the buying patterns of repair shops and mechanics. This represents a significant opportunity to leverage the transaction patterns for assortment planning, inventory management and of course, ‘suggestive selling’.
Emcien offers analytics that reveals patterns in sales transactions, producing a complete data map of the item affinities for ALL parts. This intelligence can be input into traditional warehouse planning and retail assortment planning systems. The affinities data can be used to make traditional systems smarter as the sales patterns change, parts change and market shifts.
The current sales patterns and item affinities in planning systems are input manually using manufacturer recommendations and gut feel. These recommendations get stale very quickly and are rarely based on actual sales invoices. The value of analytics driven affinities is that the relationships are always up-to-date, backed by actual sales transactions. Emcien’s analytics produces affinities data for all parts in the supply chain eliminating the need for ‘hard coded’ rules that quickly become obsolete and are a nightmare to maintain. This enables aligning parts inventory with with sales/model changes/parts utilization based on actual invoices. The affinities data can also be use for suggestive selling to increase customer service and order size.
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SKU Rationalization and Affinities With Tobacco Products
I read this very interesting analysis of why Tobacco isn’t Going Up in Smoke.
The author argues that for 20 years the industry faced increased social, legal, and political pressure yet; it is still here, still profitable, and still reinventing its marketing to fuel growth.
The analysis is based on the following reasoning. Some investors avoid the industry due to its declining volume and regulatory, political, societal pressure. Despite those headwinds, here are four reasons why tobacco will remain a profitable for many years to come. First, the distribution network and restrictions on advertising keep SG&A 15 to 20 percentage points below other consumer sectors as a percent to gross sales. Second, regulatory pressure will meet reality. Record budget deficits at the federal, state, and local level will necessitate tax revenue from tobacco long term. Third, under the Master Settlement Agreement, the industry has made great strides to educate people about the dangers of smoking, curb underage smoking, and limit advertising. The next generation of people that get smoking related illnesses will have a more difficult time building cases against tobacco companies for loss compensation. Fourth, SKU rationalization remains an untapped lever to protect profit amidst relatively predictable volume declines.
Items (and Categories) with affinities to Tobacco Products Are Impacted When Tobacco Prices Fluctuate
As retailer look to rationalize the tobacco product, they also need to know what items in the store have strong affinities with tobacco products. As tobacco prices have fluctuated the sale of these items has been impacted dramatically. The risk of SKU rationalization is eliminating low volume sellers that are connected with other low volume sellers. You will end up losing more sales that you bargained for; not a good thing in this economy.
SKU rationalization remains an untapped lever. There are many instances where companies have rationalized products only to bring them back and more. The failure rate of SKU rationalization is due to the lack of quantitative analysis on the item affinities on low volume sellers. There are two kinds of low volume sellers:
1. Low volume sellers that sell with other products.
2. Low volume sellers that sell in singleton baskets. These are candidates for SKU rationalization.
A complete affinity analysis of your products will reveal opportunities and low hanging fruit that you can benefit from today.
Every Item In Your Store Is Linked To Other Items
Retailing in the 21st century is no different from a high-performance, high-adrenaline sport. And like athletes, retailers are forever seeking that cutting edge through state-of-the art technology and analytics. Market basket analysis, also sometimes known as affinity analysis, has emerged as the next frontier in retail merchandising and promotions. Market Basket Analysis (MBA) enables retailers to analyze inventories in their customers’ “baskets” and identify their buying patterns.
MBA has disrupted the retail industry in a major way. According to a study carried out by the FactPoint Group, a Silicon Valley research and consulting firm, more than 50 retailers with revenues from $400 million to $24 billion, were “familiar” with MBA and were “looking to extend their capabilities” in that area. What MBA brings to the table includes quite an impressive array of qualities that most “non-MBA enabled” companies would be challenged to achieve – increase in order size and order value, improved customer service and product availability, increased sales, more customers, better customer retention, smart enterprise, and much more.
Every item in your store is linked to other items. "It is quite an amazing web of connectivity"
Understanding Your Product Affinities is Core to your business
Every retailer wants to leverage the true value of brand identity and promotions. It is hardly surprising that without proper MBA, you run the risk of eliminating one product from “Jack and Jill” items. With hundreds and thousands of items, without the right tools it is challenging to quickly see the product affinities. There are numerous examples of supermarkets pruning products only to receive a flood of calls from customers. How can I make greek salad without feta??
At the category level, the affinities can unravel how price fluctuations on one item in a category can change the dynamics of the entire shopping basket. For example cigarettes prices are constantly fluctuating, usually on the rise. In convenience store chains the fluctuations will impact all categories with strong affinities with the cigarette category. A customer walking in with a $20, will have less to spend on other items if he buys tobacco products. So – what items are those typically? What items will see a sales drop as tobacco price increases?
Understanding the product affinities is core to assortment planning, merchandising, product availability and customer service. Every item in the store is linked to other items. “It is quite an amazing web of connectivity”, quoting Roy Marsten. Emcien’s analytics unlocks that product affinity web, and presents the entire list of affinities so it’s easy to understand and drive business decisions.
This intelligence is key to driving successful retail decisions.
Your Products Are Connected!: Understanding how your products are connected in the ‘eyes of your customer’ is key to increasing sales. Every product has an average basket size and a list of items is is typically bought with. This of course can change with seasonality, promotions, price fluctuations, etc. Ranking your products on these metrics will present the best items for promotions to increase total sales.
Cross selling and up selling: Merchants go to great lengths in assembling cross-product promotions with signage, proper training, etc. If you are a home improvement retailer, you’d want to sell your services along with appropriate furniture and installation. Studying the affinities reveals whether your primary merchandising is consistent with the related cross selling. Measure the sales rate of the primary product as well as the “supporting” products.
Value your customers: Customer is always the king (or queen!). As a retailer in women’s clothing, you’d want to know what percentage of your customer’s transactions included a particular item. After this, you need to identify the value proposition of the merchandise. You can also expand your analytics across geographies and time periods, and measure the buying patterns of your customers.
Repeat business (Loyalty): Calculate the frequency with which your customers arrive at your establishment(s). Connecting the loyalty programs to affinity analysis can dramatically increase the success of your loyalty programs. From the frequency, you can identify their purchasing trends, “eyeballing” trends, consistency in purchasing a particular brand, store visit patterns, and the right space to place and promote your merchandise.
Brand and lifestyle: You can calculate brand loyalty based on shopping behavior. Whether your customers are buying high-end products or in-house products, the insights you get will help you align your brand strategy to your customers.
To sum it all, understanding what Market Basket Analysis can do for you is not rocket science, and you need not be an Ivy League graduate to comprehend its dynamics. It all boils down to listening to your most prized assets – your customers, their transactions, and formulating a comprehensive roadmap to incorporate the right analytics tools.
S.P.Richards Shows Dealers the Keys to Succeed
Just got back from S.P.Richards’ Advantage Business Conference (ABC) in Miami. It was a fantastic week packed with networking opportunities, learning experiences and fun. The HP sponsored Buccaneer Bash was amazing in scale and attendance, engulfing the Fontaine Bleu in a big party atmosphere. The next morning was a great keynote by Larry Winget, who says it like it is!
SPRichards’ Advantage Business Conference (ABC) in Miami
Apart from being lots of fun, the conference was great learning venue. With thousands of dealers and manufacturers, the key questions revolved around “How do we sell more to our customers, increase customer service and profits!”
S.P. Richards works hard to make their dealers successful. Their latest value-add is automated up-sell/ cross sell capabilities on their ecommerce web site. This capability is very powerful and could not come soon enough for the dealers. Many of them expressed their views. Here are a few:
- If we can sell on more item to a customer, who is already buying from us, the impact on sales is dramatic. (Quoting verbatim – “it’s a no-brainer!”)
- My customers want me to suggest relevant items that they can buy, while I have them on the phone! I want every sales rep to have that capability.
- It is so much easier to sell more to existing customers than to try to get new ones. So we embrace all the help we can get to service our existing customers better.
All the manufacturers agreed with this view because it’s a win-win if the dealers can sell more and more efficiently. The list of dealers at the conference was very impressive…including companies like ReStockit, Village Office supply and GiveSomethingBack.
Congratulations SPRichards! A great 2010 conference. Look forward to attending next year!
About S.P. Richards Company -
S.P. Richards Company, one of North America’s leading business products wholesalers, distributes over 30,000 business products to a network of over 7,000 resellers in the United States and Canada from a network of 44 Distribution Centers. S.P. Richards Company is a wholly-owned subsidiary of Genuine Parts Company, (GPC:NYSE)
Tips for Suggestive Selling to Increase Order Size
An online presence is considered a necessity for business today and the Internet is perceived as a significant revenue generator. However, most e-commerce websites, with the exception of Amazon and Proflowers, have not reported great sales. The disparity between the number of clicks received and the actual number of customers is stark, proving incredibly low conversion rates. Therefore, along with determining the revenue targets and projecting growth plans, you have to master strategies to increase order size.
Suggestive Selling: The Best Way to Increase Order Size
Developing online trust and enhancing a visitor’s shopping experience might gear visitors toward a particular website. However, attracting traffic and converting them into customers is not sufficient. You have to focus on increasing the order size to drastically improve sales. The most effective way to achieve results is suggestive selling.
Increase Order Size By Suggesting Highly Relevant Items
Although suggestive selling or up sell/cross sell is greatly dependent on the products being sold, the following are some tips that can improve e-commerce sales:
Positioning of up sells and cross sells: Place up sell and cross sell offers in as many product pages as possible. While big merchants will be at an advantage in this regard (since they have a larger inventory), smaller merchants have to exploit every single opportunity to increase order size. However, placing suggestions at strategic points is crucial. Remember that you want to:
• Firstly, educate the visitor about every related item available
• Secondly, inform them about the depth of your collection
Trust impulse sales at the last minute: The E-Tailing Group survey states that 38% of all e-commerce websites place up sells in the check-out page, which the customer visits after putting all items in the shopping cart. Placing seductive offers in this page works wonders. However, there are a few rules to be remembered:
• Offer a variety of price points
• Low-dollar products make for more probable impulse purchases
• Ensure that the most relevant items are offered, for example, a shirt or belt with pants
Include up sell and cross sell offers in post-order e-mails: Inclusion of additional products in all customer e-mails can boost sales significantly. Many e-commerce websites do not follow this strategy, believing that goading customers into purchasing products reduces purchase scope. However, this tactic cannot be termed as ‘goading’ since the recipient is a customer who has previously purchased from your website. Therefore, including cross sells in support or product enquiry e-mail replies and post-order e-mails is a practical solution.
Not more than three products supplementing each purchase item: The old saying ‘less is more’ proves true in this regard. Overwhelming customers with too many offers is not a good idea. To catch a shopper’s attention, there should be an average of three cross sell suggestions.
Category-bundle techniques: Package deals are one of the newest trends in e-commerce. Follow the brick-and-mortar store technique and position complementary products in such a way that consumers feel that buying the entire ensemble will serve their needs. This can be done with all items – plumbing products, electrical products, auto parts, office products, furniture, sports gears and so on.
In addition to this, you can consider hosting automated expert recommendations based on customer buying patterns and trends. This has great potential when it comes to raising sales. Automated suggestive selling ensures that the suggestions are always up to date! This is key as retailers today offer hundreds of thousands of items that are constantly changing. Manual methods for updating complementary products are just not feasible.
Grow Your Business with Value Upsell and Cross-sell Strategies
Grow Your Business with Value Upsell and Cross-sell Strategies
Gearing traffic to your website can prove quite difficult, and converting even two-thirds of the visitors into customers can be a challenging task in itself. Most e-commerce conversion rates fall between 2% and 3%, unless you are selling at Amazon (9.6%) or at Proflowers (14.1%)! Therefore, when you manage a hard-fought victory, capitalize on it through aggressive upselling and cross-selling strategies.
Benefits of Upsell and Cross-sell
When a customer enters a shop searching for a specific product, a salesman comes to their aid, provides them whatever they need while suggesting alternatives and complementary products. Perceptive suggestions by the salesperson enhance the store’s image in the eyes of the customer, since it reflects a level of thoughtfulness on the part of the store. Suggestive selling online can serve as a practical method of increasing profits.
Cross-selling and upselling have great value for e-commerce as well, since they increase:
- Average order value
- Conversion rates, since they guide consumers to select appropriate alternatives in case they are looking at the wrong product or one that does not complement the product in the shopping cart
- Exposure to high margin products
- Customer satisfaction through the recommendation of related products that will supplement the product as well as the user’s experience
- Deeper awareness about the product you are offering
Upsell and Cross-sell: Tips and Tricks
The following are certain ideas that would definitely improve your opportunity to upsell and cross-sell:
Suggest the obvious: Several cross-selling and upselling opportunities arise all by themselves. For instance, if you are offering tennis racquets, suggesting balls, bags and other tennis accessories is natural. You can also consider mentioning a few other related products and services that you provide.
Relevant suggestive selling works wonders: Overloading customers with unrelated suggestions can only serve to exasperate them and hamper purchase scope. If not immediately purchased, it will definitely eliminate chances of developing a recurrent clientele. Therefore, product suggestions should be as closely related as possible.
Expert recommendations help: Another way to facilitate upselling and cross-selling is by offering recommendations by professionals, field experts and customers. This could be anything – from a chef’s suggestion on a particular menu to a doctor’s recommendation on drugs. This is a strategy followed by Amazon.com.
Timing is crucial: The best time to cross-sell or upsell is when the customer is trying out some item. For instance, if the customer is looking for a low-priced camera and seems disappointed with a particular model’s features, the person may not mind buying a higher-priced model with more advanced features. Or, suggesting a belt when the customer is trying on a pair of trousers is quite fitting.
Offer products of a different price range: The supplementary product suggestions should be across a varied price range. If three items have been suggested, it is crucial that all three offer a welcome mix of different price points. Most often, the item that costs the least will be chosen. However, it will leave a good impression in the minds of the customers, increasing the chances of future sales from the same client.
The secret to successful cross-sells and upsells is complete focus on customer needs and requirements, instead of concentrating on increasing sale. As they say, Take care of the pennies and the pounds will take care of themselves.
Assortment Planning and Up-selling based on “This Sells With That”
Walmart’s (formerly Wal-Mart) announcement of a SKU rationalization project contained in this year’s 10-K filing with the Securities and Exchange Commission confirms the importance of this initiative for all retailers. In SKU (Stock Keeping Unit) rationalization, a retailer examines the profitability of items and vendors as a whole. When done in a linear fashion it results in lost sales and bringing back the SKUs.
SKU rationalization projects look for “What items are bought together” so that retailers and distributors can improve assortment planning. As shoppers, we all know that we buy items in groups. It is the job of the retailer to figure out what kind of stuff we buy together, so that they can optimize their assortment planning. Simple example – If I cannot buy both bagels and cream-cheese at the same time, I will go to a store where I can find it!
SKU Classification Based on Frequency of buys and Product Relationships
SKU analysis for assortment planning is based on two key metrics:
- The frequency of buys. This is a metric that measures true popularity of an item based on how often customers buy this product. For measuring popularity, it is better metric than volume as it is not skewed by one-time large volume purchases by a few customers.
- How often this item is bought with other items. This metric is a measure of how strongly correlated this item is with other items that you sell. If an item is always purchased with another item (like bagels and cream-cheese), it is very important to know the “often bought with” items, and ensure that they are stocked together and in the right proportions. Not having one item from a basket of high affinity products will result in loss of the customer.
These two metrics also apply for Amazon-esque suggestive selling for online sales. Items that have high correlation with other items are candidates for suggestive selling, up-selling, cross-selling and add-ons. For example, this would be a way to detect that cables, cartridges and paper that are bought with a particular printer. So when that printer is bought, you can automatically suggest the other items as add-ons. (Not to get too technical here, but the suggestions are not symmetrical. So – you cannot suggest a printer when a customer buys paper!)
The implications of these product relationships cannot be emphasized enough on your merchandising strategy and your supply chain planning. Manufacturers, distributors and retailers struggle to manage thousands of SKUs. This SKU classification presents a methodical approach for assortment planning to maintain the most profitable portfolio.
SKU Categorization For Merchandising, Up selling and Cross selling
The second chart presents a more detailed discussion of the SKUs based on frequency of buys and affinity with other products. (Affinity simply means “this items sells with that”. )
I - Items that have low-frequency/ high correlation are important to detect. These are trouble-maker SKUs. As companies goes though SKU rationalization projects, these items often end up on the chopping block, only to brought back again because they caused lost sales. These items are difficult to identify and there is a need for sophisticated analytics to easily identify these items.
II – Items that are bought in high quantities, but always with other items are great candidates for merchandising and bundling. They are a natural for creating sales lift and revenue lift. It is often counter-intuitive, but your #1 top seller may not be in the #1 pair of top selling items. That is why linear analysis of the SKUs based on volume or frequency results in incorrect merchandising.
III – The low frequency/ low correlation items are the targets for SKU rationalization projects. However, these items are very difficult to identify. Hence SKU projects typically end up cutting the wrong SKUs. We call these items Low-Loners. If you are a distributor, you do not want to carry these items. They are perfect candidates for drop-ship.
IV – Items that sell in high frequency, but usually on their own, require high service levels. We call these Hi-Loners. Examples of these items are cigarettes and gas at a convenience store. And by the way, beer also falls in this category. And please do not believe the beer and diapers myth! It is a myth!
The challenge with SKU management is that companies make decisions based on product relationships from hear-say, industry veterans or tribal knowledge. I think that’s how the beer-diapers myth was started! Across thousands of SKUS, and with fast changing demand patterns, this results in errors, and not a sustainable process for assortment planning and SKU management. There is too much at stake to base a companies sales and revenue on hear-say.
As SKU management is getting a lot of attention, there is need for robust solutions based on real customer buying behavior, to help companies maintain their SKUs on an continuous basis. The value is high sales, higher margins and improved customer service.
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Increasing Order Size With Basket Analysis
I came in to buy milk and I am walking out with 10 things in my basket. The man behind me had only one item in his basket. “How do you do that?” I asked. “It depends on what you come in to buy,” he responded.
There are a few “seed items” in the store that drive additional sales because of key concept ‘this is often bought with that’. These items are often found together in customer baskets and orders. Smart retailers will put these items as far away as possible, so that you have to walk through more aisles to get from one item to the other, in hope that you will buy more along the way. Bread and milk is a good example of that. The reverse is also true. For items that are often bought together, if the store does not carry both, they will lose the customer.
Every retailer knows that it is very profitable when a customer comes in to buy one item, but ends up with many more in his basket. Understanding the product relationships in the market basket is key to driving up the order size or basket size.
Understanding the Customer basket make-up
A retailer typically carries thousands of items. A small convenience store may carry 1,500 items. A grocery store typically carries 15,000. And the super stores like Wal-Mart and Targets carry well over 25,000 SKUs in each store.
Insight Into Customer Baskets and Product Relationships Based on Buying Behavior
The SKU management is a tremendous challenge because the buying pattern is truly a long tail. Retailers know their top sellers; these are easy to identify, but the frequency of buying falls of very sharply. The chart shows an example of one retail store operation over a 3-month period. The store carries 25,000 SKUs, has 100,000 transactions per month. The analysis covers a 3-month period, and shows the distribution and popularity of SKUs based on the frequency of purchase.
Here are some quick stats for insight into the baskets and buying behavior – The most popular SKU has a frequency of 3,435. That means is has been bought in 3,435 baskets. The frequency of the 100th most popular item drops off to 225. That means it is only in 225 baskets over the 3-month period. There are 4,000 SKUs that are bought only once. But the really interesting fact is that 1,800 SKUs are bought together 98% of the times. None of these 1,800 SKUs are top sellers! But when they are purchased, they are very often paired with other items. This intelligence is key to increasing basket size and ensuring the store is carrying the right items. SKU rationalization analyses that view each SKU as an independent item, that is bought in isolation, will result in incorrect merchandising and lost sales.
There basket analysis also showed the low-frequency/high-correlation SKUs. Every retailer knows the challenge with these items. These items sell rarely, they sit on the shelf for along time, and when it is placed in a basket it will only sell if the paired item is available! These are problem SKUs because they are capital hogs and always show up in inventory issues.
Insight into the basket make-up and the product affinities based on buying behavior is key to merchandising and increasing order size. Merchandizing, up selling, cross selling and add-ons based on buying behavior results in increased sales and enhanced customer experience. On the other hand, suggestive selling based on tribal knowledge and ‘he said/she said anecdotes’ will result in poor results and loss of customer good will.
Adding one more item to 10% of the baskets can increase sales by 5%
Sales Impact Of Increasing order size
The basket size or order size analysis shows the revenue potential of increasing the order size. The chart shows a typical basket size analysis and the upside opportunity of increasing order size. The results from this case study showed that adding one more item to 10% of the baskets can increase sales by 5%.
Manufacturers, distributors and retailers offer thousands of products. There is a significant opportunity to increase sales across all channels with knowledge of product relationships (what items sell together), when and where. It is commonly agreed that B2B purchase behavior is “need based” while a large percentage of B2C sales is emotion based. Hence, in B2B commerce, the product relationships have to be highly accurate to be relevant.
Quick review of definitions:
Frequency – Number of orders that contain this item
Volume – Number of items sold.
The volume of an item may be high because one customer bought a lot. However, frequency is better measure of popularity and is not skewed by a one-time large volume sale. In fact, SKU analyses will often remove large volume buyers to reduce this bias.