One of the many challenges that retailers face on an ongoing basis lies in assessing the right balance of products to present to shoppers. Assortment optimization is how retailers can determine the optimum mix of items in a product category ( category management ) to display on their shelves. Armed with such data, companies can better strategize for maximum sales and revenue, and thereby achieve their profitability target goals.
The optimum assortment is one that attracts and creates repeat customers while at the same time produces the largest profits. By virtue of assortment optimization, guesswork is eliminated. The approach consists of using market data and consumer demographic data (big data), as well as other metrics, to determine the major factors that drive consumer purchasing decisions. The ensuing data empowers the retailer with the necessary information to confidently offer a mix of items that will meet the demand of a particular shopper segment.
Among the benefits of assortment optimization are increased profit margins, enhanced customer satisfaction with the right mix of products, optimized inventory investments, building of customer loyalty, and more. The technology plays a big role in allowing retailers to gain a substantial edge over the competition.
Assortment optimization makes use of three pivotal dimensions:
– Consumer decision trees (CDTs): a method that shows how, based on behaviors and influences, shoppers prioritize category items and products.
– Instrumentality curves: a science that allows retailers to examine how shoppers reacted to past changes in inventory, as well as how they will likely react to future changes.
– Optimization: a method by which to determine the steps necessary to reach a predetermined goal.
Until recently, retailers could only surmise, based on personal experience and competition analysis, the best assortment of items and products to place on their shelves. While this strategy may be enough to survive in less competitive markets, it is precarious at best in markets with higher levels of competition.