Predicting what customers will want to purchase is a challenge every retailer must tackle. Underestimating the product mix can lead to lost customers and reduced profits. On the other hand, creating too large of an assortment can leave you with too much capital tied up in unused inventory. Assortment planning is a strategy that helps retailers deal with these inventory management challenges and stock the right products, at the right place, at the right time.
What is assortment planning in retail?
Assortment planning is a process retailers use to determine which products to offer customers in their stores or online. The goal of assortment planning is to create a merchandise mix that maximizes sales, profitability, and customer satisfaction.
Assortment planning involves analyzing a retailer’s sales data, market trends, and customer demand to identify the products that are likely to sell well in a particular location or market. It also involves considering factors such as pricing, margin, inventory levels, and seasonality.
The process of assortment planning typically involves creating a merchandise plan that outlines the products to be offered, the quantities to be ordered, and the timing of the orders. The plan is then used to guide the retailer’s purchasing decisions and inventory management.
Effective assortment planning can help retailers optimize their product offerings and increase their sales and profitability, while also providing customers with the products they want and need.
When planning a product assortment, retailers will generally consider breadth/width and depth. In a retail context, breadth/width refers to the amount of product types and product categories. Depth refers to the number of variations available for each product or category (size and color, for example.)
Why is assortment planning so important for retail success?
Retailers have always sought to optimize storage space and product selection while minimizing inventory costs. As retail markets become more competitive, inventory planning has become critical. More than ever, the accessibility of a wide assortment of products has become essential for consumer satisfaction and demand generation. For example, if a customer likes your product, but the color or size they want is unavailable, they will likely move on to a competitor instead of waiting for the item to be restocked.
The rise of online shopping has made it possible for consumers to quickly figure out where else they can purchase an item, even if they plan on making in-store purchases. Let’s say a customer is in your store looking for a formal blue dress, but you are out of that color in the style they like. They can easily search for “formal blue dress,” and be given several other local retailers they could visit at that moment. In a climate where consumers prioritize speed, it is important for retailers to make sure in-demand products are readily available on store shelves. It is hard to remain competitive otherwise.
Do shoppers still prefer physical stores to online shopping?
While online shopping is constantly gaining popularity among consumers, in-store shoppers still spend more on average than online shoppers. According to Chain Store Age, almost half of consumers still prefer in-store shopping to online shopping. There are many reasons for this. In-store shopping can feel more personalized, and associates can offer hands-on assistance and build rapport that is unavailable to online shoppers. Additionally, customers are more likely to discover products they didn’t know they wanted while in a brick-and-mortar location versus an online store.
Assortment planning considers the many factors that cause customers to make in-store purchases and helps you optimize your store to target those factors. It goes further than simply considering seasonality when purchasing inventory. It leads to consideration of factors such as store layout, shelf life, reorder points, pricing strategy, etc. The assortment planning process can become complex quickly, but it is invaluable for larger retailers, especially those with multiple physical locations with different factors to consider.
In addition to driving sales and customer satisfaction, assortment planning can also lower inventory costs. If you can figure out which items are in demand when, you will lower the chance of ordering too much of any item. This helps lower the costs of storing unwanted inventory in your stores and warehouses.
So, if assortment planning can lead to happier customers, higher profits and lower inventory costs, how can we implement it? Let’s dive into some general steps to consider.
Five key factors to tackle the assortment planning process.
1. Decide your end goal and understand your strategy.
The success of any assortment planning strategy is intertwined with how well it lines up with the brand promise and the overall goals of your business. This will impact which consumers you target with assortment planning.
For example, if you’re targeting customers driven by convenience, you will likely create different retail assortments than if you were targeting price-sensitive customers. Before you even start the assortment planning process, you should be clear on your company’s goals and the target consumers you are trying to reach with your products.
This can be a challenge for companies that have grown quickly, as they could be struggling to meet rising demand for their products before they’ve created a growth plan. Effective assortment planning strategies can help solve this problem.
2. Understand your product hierarchy and how your customers make purchase decisions.
Once you know the consumer categories you wish to target, it is time to learn a bit more about each of these categories. Decision trees are often used to do this. Simply put, a decision tree is a chart that shows the pathway that leads to a decision. They are a predictive analytics tool used in many industries. In retail, they are called Consumer Decision Trees (CDTs), and they used to understand the thought process your target consumer experiences when shopping for an item in a certain category.
A good CDT helps you figure out which product attributes most influence your target consumer’s ultimate purchase choice. For example, your target customer may consider convenience first, then brand and then price. Consumer decisions vary widely based on personal, cultural and social factors. Therefore, it is important to create a CDT for the type of customer you are targeting. This allows you to align your business decisions and demand planning with likely consumer behavior, thus maximizing profitability and customer satisfaction.
3. Create a store clustering strategy.
Store clusters are groups of storefront locations created based on shared characteristics, such as storefront type, size, location, local consumer demographics, etc. Store clusters become increasingly useful with higher numbers of physical retail locations. You may conduct assortment planning in the same way or in a similar way for stores within each cluster, which saves time, money and internal resources.
The two main things to consider when creating a cluster are assortment and space.
- Assortment is based on shopper demand for various products. It can be influenced by location, demographics etc. Product assortment decisions are made by looking at both external market data and internal sales data.
- Space refers to the layout of your stores and the amount of space they contain. Understanding your available floor space is important to consider when creating clusters, as it can influence both buying decisions and how much inventory you can keep in a location.
Once you’ve looked at category and store-based clustering, you can also factor in data about the local environments of each of your stores. When trying to localize your inventory, you can use the following categories to help:
- Base range products are stocked in the same way across your locations. Base range products are usually brands and products that are the most popular. Assortment optimization software is often used to figure out which products belong in the base range category. A good example of a base range product would be bananas. Most grocery stores keep bananas in constant stock, regardless of location and season.
- Customer assortment products are individual to each store cluster. These products are targeted to the needs of a specific cluster or local customer segment. For example, a grocery store in an area with a high percentage of vegan consumers would keep a larger variety of meat substitutes in stock.
Creating store clusters can take time and resources upfront, but these clusters will help get your assortment planning right more quickly and streamline future successful assortment planning processes.
4. Take advantage of cross-merchandising.
Cross merchandising uses complementary in-store displays to guide a buyer towards products in similar categories. It is effective because it is based on previously known customer preferences. If you’re not sure about which items to place in the same area, examine your sales and retail analytics data to see which items are often purchased together in one transaction.
5. Encourage impulse buys.
Encouraging last-minute impulse buys to increase customer cart sizes is an easy pricing strategy to increase spending within your stores.
Pick small and cheap items with wide customer appeal. Place them near your top-selling items, near check-out areas and anywhere else in your store with high customer traffic. In addition to strategic placement, you can also encourage impulse purchases by offering promotions, offering limited-time products, capitalizing on current market trends and training your associates to recommend small additional purchases.
6. Learn from your competitors.
Newer retailers can learn a lot from simply examining the top-performing companies in their industry. What kind of seasonal items are they promoting? What do their store layouts generally look like? Are there any common patterns you can find among the top 2-3 players in your industry? While you don’t want to directly copy your competition, examining their strategies can help you understand the locale and demographic you will be targeting.
When is it time to consider help with your assortment planning strategy?
How detailed your specific assortment plan needs to be depends on many factors, such as industry, company size, assortment type, and the number of physical locations being stocked. Retail assortment plans can vary from general plans for smaller retailers to extremely specific plans for larger retailers with larger financial plans.
Unfortunately, many retailers who could benefit from an uber-detailed assortment planning strategy are losing profits every day by relying on general plans and manual processes, such as utilizing Excel sheets. This is especially true for companies that grew more quickly than anticipated.
If you have a medium-to-large-sized company with a complex assortment of products and many physical locations, you may need to consider investing in a more specific assortment planning strategy that optimizes down to the individual retail store and SKU levels. These plans can identify exactly which products need to be stocked in which stores at which times.
How enVista can help.
enVista has helped many major retailers implement data-driven assortment planning strategies. We are ready to help you solve your merchandise assortment and planning challenges and improve customer satisfaction. Our merchandise planning experts offer the solutions, expertise and detailed processes needed to create personalized assortments based on your business and customer needs.