How does transferable demand help optimize assortment?
How does transferable demand help optimize assortment?
Retailers have to constantly improve their assortment in order to maximize the profitability of the category while meeting the needs of customers. Read in our article how important it is to consider transferable demand and the factors affecting it when planning the assortment of a retail network.
Why Study transferable demand?
Transferable demand is an important issue for any retailer. Obviously, retailers cannot keep the same set of products on the shelf for a long time. Market trends and product characteristics will always force a retailer to offer their customers the best assortment in order to maximize sales and customer satisfaction.
A good understanding of various scenarios will undoubtedly allow a retailer to carry out quality planning several times better than its competitors and to establish its position in the market.
The wrong choice good to remove from the assortment can provoke:
- churn of customers loyal to the removed product,
- outflow of buyers due to the lack of suitable substitutes for the removed product in the existing range.
Likewise, the wrong choice of the product to be introduced can also be detrimental in that the new product item does not attract any additional demand, but only cannibalize other products on the shelf. Thus, the novelty does not bring any benefit to the retailer.
Therefore, it is better to know in advance what the magnitude of the transferable demand or cannibalization that may arise in connection with a particular assortment change will be.
Reasons for transferable demand
In matters of assortment optimization, certain successes have already been achieved, and category management solutions help in a number of tasks, many problems still remain.
Assortment optimization is complicated by such factors as:
- The impossibility of fixing demand, since the effect is exerted by the substitution of some goods by others.
- Consideration should be given to the effect of similarity when a product is a stronger substitute for similar products than for dissimilar products.
- Impact of marketing tools on demand: price, promotion, as well as heterogeneous customer preferences in different stores.
In addition, retailers have to make decisions not only about assortment, but also in managing pricing, and these decisions must take into account the specifics of the store.
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In the process of optimizing the assortment filling of the store, it is important to understand the processes of transferable demand - how the customer's attention switches between products in the store after changing the assortment.
Here are the main reasons for demand switching:
- One or more products are excluded: in this case, buyers can choose another “replacement” product, or leave without buying.
- One or more products are introduced: buyers can either buy a new product on impulse or replace the purchase of an existing product with a new one.
Understanding the transferable demand process can help you determine the optimal assortment for a specific category in a specific store.
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How to study transferable demand, and what does it do for retailers?
Transferable demand can be most accurately studied based on historical sales data using a loyalty and availability map.
By examining purchases using a loyalty card, you can track for which goods forced buyers to return and between which groups of goods meaningful buyers chose. These groups are called transferable demand baskets. In them, the goods receive the strongest switching. By superimposing this data on the history of the availability of balances in retail outlets, it is possible to study which goods the demand is transferring to and calculate the coefficients of its transferring.
Understand to how much the missing product takes with it sales and how many sales are transferring to its nearest substitutes. Modern analysis tools allow you to simulate the transferable demand mechanism and, based on this data, optimize the store assortment for a given category.
Modeling provides insight into how a store's assortment behaves when changes occur. This helps the retailer decide which products should be excluded, provides an understanding of where the demand from the excluded products will go and to what extent. The retailer also gets an idea of the additional increase in demand, as well as the magnitude and direction of cannibalization that can arise when additional products are introduced into the assortment. In addition, the retail chain gets an idea of how the products from the new assortment will work in the future.
The Consulting for Retail team uses modern analytical tools that allow taking into account all the features of transferable demand and conducting high-quality analysis. All questions on the audit of business processes and retail consulting, ask our experts at +38 (044) 492-67-00, write to [email protected], or fill out the feedback form.
The author of the article is Andrey Shevchuk,
Head of Business Consulting C4R,
