If you were to strip down a retailer to their core goals, you’d find two: to increase profit and please customers. Each feeds off the other. Look past them and you’ll also find that both goals can be attributed to a high-level plan. That is your category strategy. Of course, it’s one thing to have a strategy and another to implement it.
Only once your category strategy has been properly implemented do you see the full effects of following one. Of course, by not following a structured plan, you’re also setting yourself up for trouble.
What is a category strategy (and what is its purpose)?
Before we dive into the process of developing a strategy around your category, which can help you to increase your profits and please your customers, it’s worth taking a step back. If only to better understand what it means when we say ‘category strategy’.
Put simply; a category strategy defines what a category needs to do to perform optimally. In other words, it’s a means to drive sales of a specific group of products and can be implemented at store level. More than that, it’s also defined by the role the category takes on within your stores. There are four primary consumer-based category roles available to you - Destination, Seasonal, Routine, and Convenience. You can choose to have one or a combination of these roles within your store depending on the shoppers you want to attract.
Let’s say, for example, you are a large chain pharmacy retailer who is looking to become the store of choice for Hair products. You’d thus make your Hair category a Destination role to become known as a primary category provider. To further that goal, you’ll also need to choose the correct tactics to help you.
We’ll cover the different category tactics in more detail later on in this piece. But for now, it’s worth mentioning that your tactics should be applied to your category to ensure it meets the requirements of the role. Just to note, you should also strive to have categories that fulfil the needs of each role. That’s to keep your customers satisfied.
For example, you may be the sole retailer of an international coffee brand, which will force customers to only shop your store for that brand, making your category a destination category.
What are the consequences of not following the correct category strategy?
If following a category strategy means you can please both your customers and increase your bottom line, the consequences of not following one are self-evident. You’ll see a loss of income and unsatisfied customers.
There is also the long-term damage that an unsatisfied customer can have on your business to consider.
That said, it’s not so much about following a category strategy as it is about pursuing the correct strategy. After all, you can have the best plan in the world that will place you above and beyond your competition. You can even execute it flawlessly. But it will mean nothing if you don't align the strategy for your products with the role that you are attempting to fulfil.
Let’s say you run a handful of grocery stores and you’ve chosen to stock DVD’s in all of them. Nothing wrong with that if you’ve chosen a Transaction Building strategy for this category which aims to increase basket size. The problem comes in when you chose to follow a Traffic Building strategy for this group of products. That’s because your customer isn’t coming into your grocery store to buy DVD’s. You’re a Destination store for fruit and vegetables.
That means that when you set up your initial strategy for your DVD category, you did so without deciding on the role it would fulfil. Alongside that, you’ll have executed the wrong product assortment strategy.
As a result, you’ve wasted your money buying a large variety and quantity. You’ll sit with hundreds of unsold DVD’s. Also, your expected ROI will be non-existent, and you’ll have to write off that stock. If you make the same mistake for other categories in your stores, you’ll soon find yourself with the problem of having too much of your capital caught up in storing inventory that you can’t sell.
A guide to creating a winning category strategy
1. Decide on your category definition and role
Before you can think about creating your category strategy, you need to first decide on the definition of each category. Why? It’s simple: your category definition sets the foundation for which products will be carried in your stores as well as how you will merchandise them together.
More than that, the planning that goes into this grouping of products will determine whether or not the shopping experience for your customer is as comfortable as possible.
When deciding on the definition for your categories, your decision should be based on the consumer decision tree (CDT) because it shows you how your shoppers prioritise when deciding what to buy. For example, when it comes to purchasing an ice-cream, will your customers make a decision based on flavour, brand or the size of the packaging?
Along with that, your CDT will also show you the relative importance of product attributes. Another important aspect is that there should be a certain level in the product hierarchy on which your products can be interchangeable. Let’s use ice-cream cones as an example here. If a specific brand or flavour is out of stock, your customer will buy another brand rather than not buy any ice-cream at all.
Once the definition has been decided on, you need to decide on the role of each of your categories. Your category role determines the depth of the range you carry. As mentioned earlier, there are four main category roles from which you can choose. The role your choose also establishes the purpose for the category so, it’s crucial you choose wisely. And always consider your consumer first.
If you’re struggling to decide on the role you want to apply to a specific category, then you need to ask yourself why that group of products is in your store. As much as you might want to stock a product, if it doesn’t make sense to your customer, it’s not worth stocking.
2. Analyse all possible data
With the category definition and role down, the next step is to analyse all possible data. It is the third of the six steps that makes up the category management process. It is known as insight generation and involves an in-depth analysis of your market, consumers and competitors.
First up is your market assessment, which is only possible if you purchase market data. While it provides you with an understanding of your performance versus your competitor, it’s costly. It also allows you to identify trends as well as any potential opportunities or threats.
The second assessment focuses on the consumer. Fortunately, it’s also easy to gather since it will come directly from your point of purchase of till area. By analysing the sales and units data over a period of 6 to 12 months, you will gain a better understanding of the shopping behaviours of your customers.
A bonus is that you can also use the information you gather to allocate space accordingly with each of your categories. For example, if a specific sub-category, brand or segment is generating 80% of your overall sales, you can give it proportionally accurate space allocation based on those sales. As a side note, when determining the correct category space allocation, you do need to consider more than just your over sales contribution.
The third assessment is to look at your actual categories. The purpose of this evaluation is to look for opportunities within your product groupings from a few perspectives, including amongst others, your pricing, product assortment, placement and promotion.
The objective of such an assessment is to find out whether to continue with the present category categorisation, which categories require additional effort to generate more profit, and which areas offer the highest turnover and return on investment.
In short, by gathering, analysing and understanding your data, you’ll have a guide for better decision-making.
3. Decide on your strategy and match it with the appropriate tactics
The strategy you choose depends mainly on the type of products within the category. Once your strategy is in place, it’s all about finding a tactic to match.
In brief, there are six category strategies - Traffic Building, Transaction Building, Profit Generating, Turf Defending, Excitement Creating, and Image Enhancing. And similar to your category roles, you can have multiple strategies in your store.
In fact, you would need to have a different strategy for each of the categories in your stores while also having one to tie them all together.
For example, let’s say you run a chain of medium-sized supermarkets and you stock toothbrushes. In such an environment, where customers purchased this product on a regular basis, you’d consider taking on a Routine category role. As part of that role, you’d want to stock 70 to 80% of the range to please your customers.
As far as strategies go, a good one to follow would be Traffic Building. Since tactics revolve around your pricing, the placement of your products, product assortment and promotion, you want to match that to a Traffic Building strategy.
In this case, a good product assortment tactic would be to focus on the top 10 products within your category. Just to note, you must also consider your overall target when deciding on your strategy and tactic. If you’re looking to increase your turnover, Traffic Building is a good strategy. On the other hand, if you’re looking to increase customer loyalty, a Traffic Building strategy wouldn’t give you the outcome you’d want.
Interested in reading more about the different category roles and which strategies suit which? It’s worth reading this piece.
With everything in place, it’s now time to see if all that hard work has been worth the effort. You’ll soon find out if that is the case.
But how do you implement your strategy? That’s where a robust and holistic category management solution can help you.
On the one hand, you’ll get access to an assortment planning tool that can help you to pick the right product assortment for your target market. Since your product assortment feeds into your category role, and your category role determines the depth of your range, it’s crucial that you have a firm hold on it.
On the other hand, you’d also get access to a space planning tool, which can help you present your shoppers with logical and shopper-friendly product layouts. This is not just about what is on the shelf (micro space planning) but also how your store is laid out (macro space planning). Furthermore, such a tool can also help you to implement any promotion tactics as you can display your products in a way that will catch the eye of your customers.
Considering that category management is data-intensive, it’s also crucial to have all of your retail data talking to each other. With all of the valuable information about your space planning efforts available in a powerful retail analytics tool, you can indeed understand how your retail space is performing, and tweak it where necessary.
It needs to be said: a strategy is nothing without implementation. At the same time, you can’t implement a strategy without first having one. Both rely on each other.
Interested in finding out how DotActiv’s category management solution can help you to implement your strategy and meet your goals? Click on the red button below to get your free demo.