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DemandTec eBook: Category Review

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Category reviews are a critical component of your business planning process, helping to ensure your business success. If you want to stay ahead of your competitors in these trying times, you need to …

Category reviews are a critical component of your business planning process, helping to ensure your business success. If you want to stay ahead of your competitors in these trying times, you need to use the latest merchandising techniques. It is no longer enough to make decisions about assortment, price, and promotion based on a one-size-fits-all customer strategy and outdated analytic models. Retail winners are using new techniques that include assortment analytics, basket analysis, and customer segmentation to uncover new insights and ways to improve business performance … and deliver the desired shopping experience.

If you want to stay ahead of your competitors in these trying times, you need to use the latest merchandising techniques.

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  • 1. Do not printtHein Category review for retailers
  • 2. table of contents introDuCtion 2 Category reviews are time Consuming 4 applying DemanD sCienCe to your assortment DeCisions 6 applying DemanD sCienCe to your priCing DeCisions 8 applying DemanD sCienCe to your promotion DeCisions 10 summary 12 assortment optimization assessment 13the private label opportunity assessment 14 strategic pricing assessment 15 in category review for retailers about DemanDteC 16 nextGEN in Category Review for Retailers
  • 3. “ IntroductIon If you want to stay ahead of your competItors In these tryIng tImes, you Category reviews are a critical component of your business planning process, helping to ensure your business success. If you want to stay ahead of your competitors in these trying times, you need to use the latest merchandising techniques. need to use the latest merchandIsIng technIques. ” It is no longer enough to make decisions about assortment, price, and promotion based on a one-size-fits-all customer strategy and outdated analytic models. Retail winners are using new techniques that include assortment analytics, basket analysis, and customer segmentation to uncover new insights and ways to improve business performance … and deliver the desired shopping experience. in tHis DoCument, we proviDe you witH praCtiCal tips on How to unDertake a Category review tHat leverages: • Customer insights to ensure that you are serving your most profitable customers • Assortment analytics to provide new insight into which products to add or drop based on incrementality • Basket analysis to measure the full impact of promotions • Image item analysis to confirm the best image items for each customer segment2 Introduction 3 nextGEN in Category Review for Retailers
  • 4. cateogry revIews are tIme consumIng assortment priCe promotion How much space What role does my category have? should I give my How does that impact price and category? promotion policy? Category How do I effectively remove a product from Category reviews require you to focus on all aspects of the my assortment? What price will be most business, leaving little time for detailed analysis of any one effective in this goal? component. In a category review, you must look at all of your merchandising levers—assortment, price, and promotion—and How do I How does my How does my then evaluate your strategy for the category, competition, differentiate my base price compare promoted price private label, and customers. The chart on the right details offering? to that of my compare to that of Competition competition? my competition? some of the most critical questions you must answer during a category review. Traditionally, merchants have struggled to obtain enough data to make decisions and have relied heavily on their intuition. How can I use Should I have a How do I use private label to tiered private promotion to As businesses become more complex, and retailers are being private promote customer label strategy? encourage trial driven to make decisions not just for a category or for a label loyalty? What is my and repeat optimal price gap to purchases? store, but also for specific customer segments, the need national brand? for deep, data-driven insights about customer demand has grown. Application of consumer- demand intelligence can be Which products What are the best What promotional invaluable in making those decisions. By applying econometric attract my best image items for tactics work for models to your data, you can gain insight regarding consumer and opportunity each segment? which customer Customer behavior as it applies to your products. By going one step customers? segments? further and applying those models to specific customer segments, you will gain deep and rich insight into how to drive growth with the customers who matter the most to your business.4 Category Reviews Are Time Consuming 5 nextGEN in Category Review for Retailers
  • 5. applyIng demand scIence to your assortment decIsIons In a category review, you will need to determine which products adds incremental sales to the category. By applying the principles of to add and which to delist. Many retailers take a traditional incrementality and transferable demand, you can understand what will ranking-report approach to creating assortments, in happen to the demand for a product if it is delisted. Will that demand shift which they simply rank all of the items in a category by sales to other products you carry, or will it transfer outside the store, or, even and—with some modification based on their experience and worse, carry the customer entirely out of the store? Applying this type of good judgment—more or less replace items from the bottom demand science to your assortment decisions can help you increase the up. While this approach is easy to execute, it often produces variety in your assortments, improve SKU rationalization and assortment assortments with too little variety and too much duplication. localization, and boost the effectiveness of your tactical efforts, such as The result is diluted sales across similar items, no improvement making one-in-one-out assortment decisions. in store traffic, and underwhelmed customers. DemanD sCienCe Can Help you answer By applying demand intelligence to your assortment questions like: decisions, you can dramatically improve that process by using econometric models to determine which items should • Which items are my best sellers? be stocked, by store or store cluster, based on the customers who shop at that store, the competitive environment, • Will I lose customers if I drop low-selling items? and a quantified understanding of whether each item in a • What products are most important to my various category is merely duplicative or truly provides variety and customer segments? • How does private label play into my assortment? • Which products should I private label?6 Applying Demand Science To Your Assortment Decisions 7 nextGEN in Category Review for Retailers
  • 6. applyIng demand scIence to your prIcIng decIsIons A standard part of any category review will be to reassess your tHis insigHt proviDes you wHat you neeD to: priCing strategy for the category. Do you have clarity on the right role for the category? Have you identified which • Define the role and intent for each category based on importance to are the right image items for that category? What is your competitive strategy for the category? Answers to all these customer, customer segment, and business in general questions can be improved by applying consumer demand • Update image-item lists, including at the segment level, ensuring intelligence. competitive pricing on the right items without unnecessary margin loss Rather than basing pricing on cost-plus strategies or merely • Develop forecasts for pricing actions for categories that are reacting to competitors’ pricing, many retailers today are leveraging powerful consumer, demand, and market insights underperforming or losing share to price every item in the store. By applying econometric • Understand which promotional levers are most effective at the category models and optimization techniques, you can capture the elasticity of each item, in addition to cannibalization, and item level halo effects, cross-category pull-through effects, trends, • Determine what price to charge for private label items, including gaining seasonality, and a host of other causal factors to deliver a true, accurate depiction of demand forecast. Moreover, you can insight into the ideal price gap between private label and national understand these factors for all customers in aggregate, or by brands specific customer segment.8 Applying Demand Science To Your Pricing Decisions 9 nextGEN in Category Review for Retailers
  • 7. applyIng demand scIence to your promotIon decIsIons promotion strategy is another critical component of a tHis insigHt proviDes you witH tHe ability to: category review, and once again, applying consumer demand intelligence to promotions will enable you to maximize the • Understand forecasts associated with various promotional options total store impact on all categories, as well as the impact on specific customer segments. By taking into account based on price and associated tactics cannibalization, halo effects, and cross-elasticity effects • Determine the optimal promotional price of regular retail and markdown programs in place, you can quickly determine the best discounted price for any item • Understand which promotional levers are most effective at or promoted item group; the best type of temporary price the category and item levels reduction, such as buy-one-get-one, percent off, and multiples discounts; and the best use of merchandising support, such • Understand the effectiveness of promotional levers by as ads and displays, to maximize the incremental lift and total customer segment store impact of every promotion. Moreover, consumer demand science can help you understand how to reach certain • Determine which customer segments drove a particular customer segments through promotional levers. promotion’s performance10 Applying Demand Science To Your Promotion Decisions 11 nextGEN in Category Review for Retailers
  • 8. summary 1. assortment optimization assessment provides merchants an analytically based assessment of their assortment, taking into account incrementality and transferable demand at the segment level. This assessment delivers recommendations for an DemandTec offers a wide array of technologies and services optimized assortment based on transferable demand and that enable retailers to drive analytical insights into their cannibalization, not ranking reports. These recommendations category review. We leverage our industry-leading optimization incorporate customer insights to ensure the proper technology and the expertise we have gained in working with assortment for the target customer segments. Moreover, more than 100 of the world’s leading retail banners during the recommendations are tailored by available shelf space the last 10 years. and include recommended facings for each store cluster and integration into space management tools for store- Whether or not you are currently working with DemandTec, specific plan-o-grams. Finally, forecast of the sales and profit we offer three service engagements that not only provide implications associated with the new assortment prior to analytical insights, but can offload the work of developing execution are provided. those insights from you to our professional services team. These services are complementary and can be performed independently or together. demandtec offers a wIde array of technology and servIces that can enable retaIlers lIke you to drIve analytIcal InsIghts Into theIr category revIew.12 Summary 13 nextGEN in Category Review for Retailers
  • 9. 2. private label opportunity assessment 3. strategiC priCing assessment provides delivers a set of analyses that combine Nielsen data and an analysis of historical sales to help you understand how DemandTec models to create deep understanding of private customers are responding to price changes; how you are label performance and pricing opportunities to drive profitable positioned relative to competition; and what the resulting private label growth. market share is for all products across the store. With this assessment, you will gain an understanding of In the Strategic Pricing Assessment, DemandTec will deliver which private label categories are performing to expectations a definition of the role and intent for each category based on and which need course correction. DemandTec deliverables importance to customer, customer segment, and business include: in general; an updated image item list, including at segment level, thereby ensuring competitive pricing on the right items without unnecessary margin loss; recommendations • Recommendations for adjusting private label pricing based and forecasts for pricing actions for categories that are on competitive positioning underperforming or losing share; and finally, an understanding • Identification of the promotional levers that drive the most of which promotional levers are most effective at the category and item level. sales at the category level • An understanding of pricing for private label products relative to the marketplace For more information about these services or how DemandTec • Recommendations for price gaps between private label can help you with category reviews or merchandising products and the national brand alternatives and marketing optimization more broadly, contact us at 650.645.7100 or visit www.demandtec.com.14 Summary 15 nextGEN in Category Review for Retailers
  • 10. about demandtec ContaCt us DemandTec One Franklin Parkway Building 910 San Mateo, CA 94403 USA inquiries DemandTec (NASDAQ: DMAN) enables retailers and consumer Phone: +1.650.645.7100 products companies to optimize merchandising and marketing Please visit www.demandtec.com decisions, individually or collaboratively, to achieve their sales volume, revenue, shopper loyalty, and profitability objectives. DemandTec software services utilize DemandTec’s science-based software platform to model and understand consumer behavior. DemandTec customers include more than 230 leading retailers and consumer products manufacturers such as Ahold USA, Best Buy, ConAgra Foods, Delhaize America, General Mills, H-E-B Grocery Co., The Home Depot, Hormel Foods, Monoprix, PETCO, Safeway, Sara Lee, Target, Walmart, and WH Smith. Connected via the DemandTec TradePoint Network™, DemandTec customers have collaborated on more than 3.5 million trade deals.16 About DemandTec 17 nextGEN in Category Review for Retailers