CATEGORY MANAGEMENT FOR RETAIL

ABSTRACT

Category management comes from CPG industries.  This is a strategy used to assign a role to a major product category.  The roles are destination, occasion, and convenience and routine.  These roles are assigned based on calculations along two dimensions: percent purchasing the category and number of purchases.

CPG assumes their entire customer base assigns the same role to each category.  A better strategy for retail would be delivery of a behavioral segmentation and calculate each role BY SEGMENT.  Thus segment X might assign the role of say destination to one category but segment Y assigns the role of occasion, based in the landing in the 2×2 grid.  This provides better targeting and creation of more compelling message, in that not one size fits all.

 

Category management (as a strategy) comes from CPG industries.  CPG defines four “roles” that customers give to product categories.  A category is a distinct, managed group of products that customers perceive to be interrelated or substituted for their needs.  These roles are not driven by finance, advertising or supply-side logistics but by customer behavior.

The roles assigned to product categories (using groceries as an example) are:

DESTINATION: Key staples like milk, bread and meat.  It is WHY shoppers visit.  A large percent of customers buy these products and they buy a large number of them.

OCCASION: Important to the shopper, mostly seasonal or based on occasion / season, e.g. birthday, anniversary, Christmas.

CONVENIENCE: Purchased infrequently, but important when a customer buys them. In a grocery store these are hardware items, shoe polish, etc.

ROUTINE: These tend to be items like pet products, paper towels, toilet tissue, etc.  A small percent of consumers purchase these but they buy a large number of them.

In groceries, a role is assigned to a product and assumed that all shoppers give that same role to the product.  In retail that is not the case.  This is important.  Grocery stores assume all customers assign say milk as a destination role and come to the store specifically for that.  Retail assumes that different segments may give different roles to the same product.  That is, one segment may indeed go to the grocery store specifically to buy milk but another buys milk only for say cooking and therefore assigns it a routine role.

Analytics can show that different segments assign a different roles to the SAME category.  Again, say segment X assigns the role of “destination” to kid’s clothes (it is the reason they come to the store) but segment Y assigns the role of “seasonal” to kid’s clothes.  No marketing strategist would message kid’s clothes the same way to each segment and that is the point.

Now, how do we determine (calculate) the assignment of these four roles by segment?  There are usually two metrics that distinguish a simple lattice squares, a 2×2 matrix.  The percent of the segment purchasing the categorizing is on the vertical axis and the number of items (of the category) purchased is on the horizontal axis.  See figure 1 below.  The four quadrants of these metrics, when comparing one segment to another, tends to differentiate and assign the roles described above.  (In practice, these metrics are indexed by segment and plotted on the above metrics as axis.)

 

 

FIGURE 1 CATEGORY ROLES

 

% segment OCCASIONAL DESTINATION
purchasing CONVEINENCE ROUTINE
# of items purchased

 

Using this descriptive framework, each segment can be plotted in terms of product categories.  That is, where a grocery store assumes all customers treat say steak as a staple (a destination role) there may be a segment that treats steak as an occasional (even seasonal) role.  This means that after segmentation has been performed each segment can be plotted and different roles can be assigned.

As an example, see figure 2 below showing MEN’S CLOTHING & ACCESSORIES.  The metrics are “percent of segment purchasing” and “average number of category units purchased by segment”.  These are then indexed to the mean and plotted on the graph (figure 3) after that.  Note that segment 1 plots as occasionally (even seasonally) buying MEN’S CLOTHING & ACCESSORIES whereas segment 2 calculates as assigning a destination role to MEN’S CLOTHING & ACCESSORIES.  No marketing manager would send the same messages or offers to these two segments in terms of this category.

 

FIGURE 2 CATEGORY MANAGEMENT METRICS

MEN’S CLOTH / ACCESS % PURCH # PURCH
SEGMENT1 0.65 1.10
SEGMENT2 2.18 2.41
SEGMENT3 0.03 0.05
SEGMENT4 1.88 1.54
SEGMENT5 0.26 0.27

 

 

 

CONCLUSION

Category management came from CPG industries.  This is an approach that each category (major product) is defined in terms of four different roles assigned by customers.  These roles are destination, occasion, convenience and routine.  The classification of these roles depend on customers scoring along two axis: percent purchasing and number of purchases.

Take this approach one step further and do category management by segment.  That is, one segment may treat a product category as say a destination but another will treat that same product as convenience.  This differentiation means that messages and promotions and bundling offers can be versioned by segment.