Tag: retail analytics
Connect With Us
Are Your Promotions Increasing Basket Size or Just Discounting Items
Are your promotions increasing basket size or just discounting items that your customers would have bought anyway! I just talked to an old friend, who is now CEO of a convenience store chain. He told me that they had completed a marketing program and he suspects that he just ended up discounting stuff that customers were going to buy anyway!
Currently the retail industry invests four to six percent of its revenue on marketing programs, and promotions. With that size of spend, C-level execs are rightfully asking - Are the promotions and programs working? Are we creating programs on items that will cause maximum sales lift? OR are the promotions just discounting items that customers would buy anyway? (“Let’s buy just the drink, it’s on sale!”)
Leverage Product Affinities To Create Promotions That Increase Basket Size
With limited marketing dollars and a desire to see real ROI, these are very important questions for effective promotions. All items in a store are linked by affinities. Leveraging the product affinities can drive higher success rate in your marketing programs as it aligns with customer buying patterns.
Items with very high volume sales occur in a large number of transactions. This creates a lot of noise and leads marketers to believe that these items can drive sales increase. For example – in a convenience store, drinks are big sellers. However, promotions on drinks will typically just end up discounting drinks! The good candidates for promotions tend to be far lower on the sales popularity chain. While lower in sales, they have higher ‘basket size’. This means that they occur in transactions with more items. Promotions on items with higher basket size causes sales lift, as these items drag along sales of items with affinities.
So – the next time you are creating a marketing program, ask yourself – ‘what is the average basket size for these items? Am I going to lift sales or just discount stuff that they are going to buy anyway!”
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)
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.
Comments Off
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.