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8 minute read
Maintaining an optimized assortment can have a positive impact on your pricing strategy and core business strategy. How many products should there be in an assortment, and how should they be priced individually? Does adding more products change the dynamics or psychology of customer choice? Or are there too many products that neither the customers nor the production department really can cope with?
Finding answers to these questions and optimising your assortment has a number of benefits. It is a scientific process that combines both internal, external, past and present data. This is a challenge in many industries. Classically, consumer goods manufacturers go through an assortment optimization (read: reduction of number of products) every few years as they also add many new innovations. But all kinds of other industries have similar challenges: how many car models to offer? What kind of software packages / plans should a Software-as-a-Service vendor offer?
If certain product categories are performing better than others, you can stock more of these products in your stores. On the other hand, if certain product categories aren’t performing well, you might want to consider creating reduction strategies for these products to clear stock. This will also improves customer satisfaction. By stocking top-performing products, you’ll be providing customers with the products they want to see on the shelf.
Assortment optimization drives sustainable growth, helping companies make informed decisions by understanding consumer purchasing behaviours and preferences between products. The following are 7 tips to optimise your assortment and boost top-line growth in your business.
Assortment Optimization Tip 1: Understand Value and Willingness-to-Pay of Individual Products in the Assortment
Willingness to pay (WTP) is the maximum amount a customer is willing to pay for your product or service. This makes willingness to pay a crucial factor when finding the best price to sell a product at, for both the seller and buyer.
When consumers go shopping for a product or service, they look at two things; the attributes of the product or service and the price. The consumer then looks for the optimal combination of the two that offers the most value for money, and you want to make sure you know what price makes your product part of such optimal combination for the customer, without leaving money on the table and losing out on profits.
There are a variety of factors that influence a customer’s willingness-to-pay, and this complexity is why many managers choose to rely on the far easier, but essentially useless, “intuitive” pricing strategies such as cost-plus, market price or guesses and gut-feel.
Value and needs of the buyer (own-value): One of the primary determinants of willingness-to-pay is the value the buyer derives from the product or service, also referred to as own-value. This includes the usefulness of the attributes and how often the buyer expects to use the product, but also the buyer’s budget as the value derived from a product or service is relative to the buyer’s purchase power.
Market value: Is the price fair compared to what the buyer perceives to be typical market prices?
The buyer also factors in how much she thinks others would be willing to pay for the product or service, and generally how attractive she thinks other people would find the product or service. This especially applies if the buyer plans on selling the product in the future (i.e. in 5 years) - and thus stop deriving own-value from it - as the buyer wants to make sure that the price she pays is less than or equal to the own-value she derives from it in the next 5 years, plus the price she receives from the eventual sale.
Value uncertainty: Many buyers face value uncertainty when making a purchase. It could be a family father who buys a car, but isn’t sure if he will sell it in the future or if his daughter will decide to get a driver’s license. Or a senior couple who buy a holiday home in Italy, but don’t know how often their children will be using it (that is, how much value their children will derive from it), and if they will ever get those grandchildren they have been asking for, so they can take their first steps on the front porch.
Such uncertainty is impossible to predict as personal motives change from customer to customer, as does the impact of the uncertainty on the buyer’s willingness-to-pay. Thus, data-backed pricing research is essential for capturing it and including it when setting your price.
Moreover, how customers perceive the price is as important as the price itself. Businesses should make sure customers have a good sense of how the firm’s prices compare to those of competitors. And most companies (luxury retailers aside) want to be perceived by consumers as having lower prices, relative to competitors, than they actually do.
In theory, setting a price should be a rational economics problem. You have a set supply of a product within an assortment and there’s a certain level of demand for it in the marketplace. Understanding willingness to pay for a specific product is essential to adjust your price until you’ve maximized profits.
Assortment Optimization Tip 2: Analyze Preferences Between Different Products
One of the most important primary drivers behind customers willingness to pay (after price perception) is product selection.
If you offer an appealing assortment and selection of products in store, consumers are more likely to engage with your brand and become loyal customers. It is essential for assortments to satisfy complex and various customer needs and wants.
There are various elements to consider when choosing which products to include in your assortment such as:
High performance: Not only is it essential to have products which are in high demand to secure sales and have a mainstream appeal across a wide range of user groups. High performing products also include niche product selections, which although lead to lower sales as the audience is smaller, can lead to an increase in loyal customers for your brands. This ensures repeat purchases from your customers. It is of high importance to keep your loyal customers. if in doubt of which two products to keep in an assortment, always favor your best customers and reward them by keeping their preferred products in store.
Coverage of consumer needs: Whilst some consumers seek convenience, other consumers priorities value. Therefore, it is essential to have a mix of products that achieves these variety of product needs to engage with a wider set of consumers.
It is crucial to have an in-depth understanding of consumer preferences for products and their specific needs; this also helps understand the substitutability patterns and understand product benefits and possible substitutes or additions necessary to increase consumer engagement within your assortment.
Relevance: It is also of great importance to ensure the products within the assortment are of relevance to your specific target consumer group. There should be a variety of targeted options within an assortment.
Assortment Optimization Tip 3: Run Simulations Using Conjoint Analysis
Choice-Based Conjoint Analysis is a popular method of product pricing research that can tell what value customers put on different features (often known as "attributes" and "levels) It helps select product features, assess sensitivity to price, and predict adoption of new products and services as well as help with determining bundling packages, all useful when optimising assortments.
In a Choice-Based Conjoint Analysis the objective is to find out what value consumers put on each attribute/level, based on the preferences they exhibit when shown different combinations/options. It is frequently used across different industries for all types of products, and businesses of all sizes.
Knowing the part values, i.e. the value behind each attribute/level, the willingness-to-pay for the overall product can be derived. The strength of the method is also that it can be applied to both existing products, competitor products and new products not yet launched, thus making it a very effective tool for the value-based pricing practitioners.
At PriceBeam we offer our Value Attributes study type that does all of the heavy lifting for you when it comes to optimizing prices with conjoint analysis. It is useful when there are many possible SKUs that could be introduced into an assortment, and not all can be.
Assortment Optimization Tip 4: Calculate Relative Value of Competing Products
Competition in the market has gotten much more aggressive and comparing prices online is easy, making customers aware of the monetary value of the products they purchase. Therefore, it is important to take into account the relative value of your competitors’ products when optimizing your assortment.
When introducing or pricing products in your assortment within a market where you have a high number of substitutes or competitors, considering your competitors actions and the value of their products might be one factor driving your profits.
When setting higher prices than your competitor you must focus on improving the value of your products in relation to your competitors, by adding new or better features in your product, to justify the price increase.
The most common tactic when deciding the price of your product is setting it according to competition, also know as competitive pricing strategy. Here, there are no differentiating factors. If your products features are better than the competition, they will fall behind. However, this pricing strategy demands that you have in depth knowledge of your market and target audience.
Assortment Optimization Tip 5: Check for Psychological Price Points
It is important to consider various psychological factors when pricing within an assortment. The reason why people purchase a specific product are not always clear and although consumers will state they buy their products due to their value and features, research shows emotional factors influence purchase decisions as much.
The presentation of the figures and image of the price are two factors that directly influence the effect caused on the consumer. The psychology of prices is one of the most studied areas by pricing experts and marketing strategists, as consumer perception is of utmost importance in determining a sale. Price, is one of the fundamental aspects of this.
Popular tactics encompass the categories of offering lower prices, giving out discounts and tailoring the product experience to the consumer. Examples of these strategies include in price point policies coupons or in-store discounts and an optimized assortment mix offering good/better/best products.
One of the most common mechanisms in range price optimization is the concept of "price anchoring". It relates to the practice of establishing a reference point that customers can relate to when judging the value of a product. In a simple form it could be "was 200, now 150". The 200 is the anchor price that the customer relates to, and 150 is the actual sales price of the product you want to sell. Price anchoring is strategically managing the frames of reference that customers use for valuing your product by creating and adjusting price anchors.
Assortment Optimization Tip 6: Understand Value Drivers for Features and Benefits
Value drivers are product or service features that improve the perception of the product or service a business is trying to sell and can help businesses grow substantially. Value drivers include technological features, brand awareness, and customer satisfaction. Value drivers are also what set a firm's product or service apart from its competitors, acting as a competitive advantage.
Value drivers allow companies to influence their customer base to purchase their product or service. The distinctive traits that a business' product has will thus make said product look more attractive than its competitors. Once a company has figured out which value drivers boost its profits and its standing amongst competitors, it can use those value drivers to implement successful pricing increases.
It is key to understand value drivers in assortment optimisation. What role does each product play within an assortment in terms of offering value to the customer? Do customers see a difference between the 5, 7 or 10 products in the range? Do they value those differences and accept that some of them should be premium priced? or do all 10 items seems to be all the same to the (potential) customers? In other words, does each product in the assortment have a clear and distinct value role to play?
Comparing demand for products within an assortment can help target your consumer segment. Whilst some products might have a clear distinct value, other products within an assortment can be too close to each other in terms of value perception and thus you migh have to reconsider the specific benefits delivered to the consumers and the respective prices you place on them. On the other hand, it can also determine whether it is advantageous to add product extensions to an assortment.
Assortment Optimization Tip 7: Get Repeated Feedback from Customers
You have to constantly monitor your customers interests and preferences along your business processes to make sure they are optimally aligned. The more customer insights you collect the more efforts you will have to make sure your assortments are optimized in every possible way and tailored to your market demographic and preferences, which will lead to significant payoffs. You need to be constantly revamping your assortment.
By getting repeated feedback from customers you can have control over the variety of products you offer. Understanding how your consumers shop, you can place an emphasis on the quality in the variety of products and tailor your shelf space accordingly. By increasing the stock of those products which are popular at the time and trimming down low selling products, you can create an assortment that is a precise representation of your selected group of consumers´s shopping behaviours.
Moreover, you must also be aware of which brands are doing well in your category from your top competitors. Competitive data will help analyze assortment gap between your brand and competitors, giving you and advantage to fill in these gaps by increasing stock of a specific product in your assortment or introducing a new one. This can ensure your assortment products are fresh and on the forefront of your industry. However, it is crucial to have deep knowledge of customers preference and combine it with competitor data on the specific categories you are interested in.
How many products or services in an assortment, and their individual prices, are challenges faced by many brand managers, product managers, or customer insight executives. PriceBeam's willingness-to-pay research can reveal how customers see the individual items in the assortment, and how they would choose between them.
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