Assortment strategy: the quest for more sales and better margins
Assortment strategy is a crucial business decision. Supermarkets are competing for shelf space. But banks, insurers and car brands are also asking themselves: how much choice should I give my customers? In this article, we explore pragmatic solutions for a compact assortment that delivers higher margins.
The assortment as a cafeteria model: the holy grail?
Many companies think that an assortment in the form of a ‘cafeteria model’ is ideal for their customers: individual customers can put together their own product/service. Also known as “pick & choose”. Like the pizza at Domino’s: you decide which base, which ingredients and which sauce. A seemingly attractive model that can also be applied to services like payment packages and insurance, and products like cars and sneakers.
The philosophy: there are so many different customers that we cannot possibly make a range that makes everyone happy. So we give the customer the choice. Because a customer who can put together the product according to their own needs is a satisfied customer and the best guarantee for more sales.
Arguments for remediation of assortment
There are, however, also reasons for keeping the assortment clear. The most important ones:
- Cost: More choice for customers in many cases, means more costs for the company. Ranging from logistics costs (inventory, shelf space) to operational management costs (adjusting IT systems, working out documentation, updating terms and conditions).
- Operational complexity: More choice for customers means a greater variety of customer requests when something goes wrong, and great challenges to facilitate employees in their work. We see many companies following the path back to downsizing after years of assortment enrichment because of management complexity and cost.
- Paradox of choice: More choice often leads to “choice stress”, resulting in fewer sales (Paradox of choice, Schwartz (2014).
In practice, we found that there are often too many different variants of a product. For example, for a top 10 car brand, we found that 5 out of 48 variants of a model accounted for 75% of sales volume. The 80-20 rule still often holds true.
People are less unique and less free in their choices than they think they are
One of the challenges with assortment strategy is that people overestimate their own uniqueness and need for freedom of choice. Marketers that conduct research on customer preferences must keep in mind that the importance customers say they place on freedom of choice does not reflect their actual behavior.
To the bank, customers say they want to be able to switch their investment profile, but most customers never change. Adidas and Nike offer customers the ability to completely customize sneakers, but most customers who choose to do so first look on social media to see what is popular and copy that. One fashion retailer we worked for discovered that a pullover available in 16 colors sold especially well in the color the model wore in the brochure. More than 60% of sales were in this color.
How to make choices
How do you determine which components come standard in a product (package) and which can be chosen as supplements? Based on our experiences in telecom, finance and automotive, we arrive at the following general maxim:
Standard items are items:
– that are relevant to large groups of users;
– that ensure price and value are balanced for customers;
– in which revenue outweighs the cost of the elements.
An add-on is commonly used to
– fill a particular need of a specific target group;
– be “on par” with competitors in terms of proposition elements;
– keep the cost of a standard package competitive.
Assortment strategy is customized
Supply strategy is by definition customized. Because it depends, among other things, on the variation in customer preferences, the size of target groups, the willingness of customers to pay for specific features, the cost structure of the company, the operational flexibility of the organization and the competitive environment. The challenge is to find an assortment strategy that finds the optimum between “one-size-fits-all” and the “cafeteria model. Below we describe two practical solutions.
1. Good-better-best (versioning).
Good-better-best (versioning) is a widely used approach for product differentiation, where ‘good’ represents the basic version of the proposition, ‘better’ represents the variant with more added value and ‘best’ represents the most comprehensive variant.
This strategy is a good choice when all customers buy basically the same basic functionality but additional value elements can be added per proposition. Compared to the ‘one-size-fits-all’ proposition, more sales are realized in the price-sensitive segment. And more margin is realized in the target group willing to pay for the ‘best’ variant. Understanding willingness to pay and price sensitivity is therefore essential for finding the optimal assortment composition.
Use the distance within your range in a smart way. For example, as the ANWB does with its Wegenwacht packages. ‘Assistance in home town’ is added to the second proposition, because the company knows that this value element is one of the most important for many customers.
In addition to optimizing volume and margin, the good-better-best approach can also be leveraged for other strategic goals. For example, Apple introduced a “good” variant with the iPhone SE. Besides selling more phones, they also connected more people with their related products and services, such as iTunes, chargers and the AppStore. Emirates actually deploys the “best” proposition (first class) to create an image of luxury across the board.
The handling of packages is in many ways similar to good-better-best, only here the customer generally has more choices. Here there is a basic/core product, which can be supplemented by different packages. The main difference with the good-better-best approach is that the propositions do not follow each other from least to most value, but customers can choose from the packages that are most relevant to them. This is a good choice when the needs of different target groups vary widely. Consider, for example, health insurance: if you are young and do little or no sports, you are not likely to choose a proposition that includes physical therapy. Or if you have perfect teeth and the dentist has no work for you, you probably won’t choose an additional dental insurance. This is why health insurers have supplementary packages in addition to the core product (basic package). LinkedIn understands the business audience. The company understands that a recruiter is not waiting for advertising capabilities and a communications specialist is not waiting for extensive search features.
3. Recognize the niche
There may also be a niche in the market that is highly triggered by a specific item in the offering. TURF analysis helps reach most of your potential target audience. Suppose research for a shoe store reveals that customers have the following preferences for shoe colors: When the retailer has space for only two colors of shoes, it seems a logical choice to choose brown and black because these colors have the highest preference. But … the 50% of customers who like black shoes also like brown shoes, leaving the total range of “brown+black” at 75%. The group that likes gray shoes is substantially different from those who like black and brown. Therefore, choosing brown and gray would result in a 100% reach within the total target group. TURF analysis maps these kinds of insights.
At The House of Marketing, we use TURF and latent class analysis to distinguish target groups (customer segmentation). For example, for a bicycle insurance policy we discovered two specific target groups. A group that values getting reimbursed for the new value of the bicycle after several years of bicycle ownership. And a group that wants to pay more for roadside assistance. The marketer with this kind of insight has an almost unfair advantage.
There is much more to say about assortment strategy. For example, how do you deal with products that give you a distinctive position over your competitors? And what if a specific part of your product is very important to a relatively small group of customers? Anyone looking for answers to these or other questions about assortment strategy can directly get in touch with us!
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