How to Build a Highly Profitable Product Assortment Strategy (2021)

How to Build a Highly Profitable Product Assortment Strategy (2021)

Everything you need to know about product assortment strategy

Creating a product assortment strategy is necessary for retailers to have a holistic, long-view plan of their business. But this is easier said than done.

There are a variety of critical tasks that are competing for a retailer’s attention, including inventory levels, budgets, allocation, etc. — with variety and assortment of merchandise often taking a backseat to more immediate concerns.

But your assortment strategy is your identity. It needs to be relevant to the current (and upcoming trends), as well as sensitive to the unique geo0demographics of your channels and locations. And it needs to fit into your retail planning process to ensure you’re still hitting your financial and inventory targets.

How can retailers stay on top of this complexity?

Before we delve into the nitty-gritty of assortment planning, let’s first get on the same page about what we mean when we say “assortment strategy.”

Retailers are now using science and technology to build changing consumer behaviour and preferences into their assortment strategies.

What is a product assortment strategy?

In retail, assortment refers to the entire catalogue of products and variations that a retailer carries on their physical (and digital) shelves. Assortment is a bit like a retailer’s finger print — no two retailers have the same exact assortment.

So a product assortment strategy is the plan that helps retailers decide which products to display and sell across their channels. A successful assortment strategy will need to take many different elements into consideration from a retailer’s identity and vendors, to store capacities, consumer demand, and profitability.

One element of this strategy is evaluating the tradeoff between deep assortment and wide assortments. 

What is a broad (or wide) assortment in retail?

A broad / wide product assortment is one that includes many different types of products with fewer variations in each category. Walmart is a classic example of broad assortment, as they allow customers to purchase shoes, lamps, groceries, and shampoo in one convenient trip. However, they don’t have anywhere near as many options for running shoes as you’d find in an athletics store.

Wide assortment breadth allows retailers to appeal to bigger demographics, but make it more difficult to appeal to more dedicated and loyal niche markets.

What is deep assortment in retail?

In contrast to wide assortment, a deep assortment is when a retailer has fewer types of products, but many more variations of products within categories. A good example of this is a specialty shoe store like Foot Locker — which mainly carries shoes aimed towards “sneaker and youth culture.” If you are looking for basketball shoes, few retailers have more brand, design, color, and size variations than Foot Locker. But you won’t find croc-leather dress shoes here.

Deep assortments can appeal to a smaller, more passionate customer base that spends more and returns regularly.

Why is an assortment strategy so important?

Your product assortment is the foundation for financial success but also a source of business risk.

Assortment decisions are made in the pre-season planning stages, which means that the decision to purchase products happens a year or more before the first sale — and another year may pass before the selling season ends.

While there is a lot that can be revisited and corrected during the in-season process — the assortment strategy cannot be changed.

Developing a solid product assortment strategy at the beginning optimizes revenue and profit while minimizing the risk.

How is an effective assortment strategy developed?

Industry-leading retailers optimize their in-store and online businesses by taking an effective, five-step approach to developing a comprehensive assortment strategy:

  1. Give similar stores similar assortments
  2. Build assortments around product families
  3. Account for changing consumer preferences
  4. Use specialized tools for assortment planning
  5. Analyze your data carefully

This holistic approach to strategy development forms a foundation upon which retailers build successful businesses and long-term growth.

1. Don’t use the same product assortment across all locations

A cookie-cutter assortment causes expensive stock-outs and overstocks across the business. Clustering retail locations by common attributes let you tailor the assortment more closely.

Considering the store format is one opportunity for clustering.

Other opportunities by which store clusters can be created may include looking at store behaviour in terms of sales, trends, climate, seasonality, or culture-specific demographics. 

The assortments at urban flagships, suburban outlets, and airport kiosks will reflect the company’s brand but the breadth and depth of the assortments will be different.

Each retailer will, of course, prioritize certain attributes when developing their clusters. 

A deep product assortment example – many different brands and styles of power tools

2. Build your assortment with product families in mind

Retailers often fail to consider the attributes that different products share across traditional categories, which results in cannibalization within the assortment eroding sales and profits.

An effective method of using product attributes is to create product families.

Families are composed of products that are mutually substitutive and compete against each other because they share a combination of similar attributes that a customer is looking for. In other words, a product family should be a representation of how customers think about your assortment.

When buying an engagement ring, for example, most customers will have an idea about the product type (rings), style (oval diamond), and price ($3000) that they are looking for. This means that, out of the entire assortment, the customer will only be looking at a small number of products that match his or her criteria. Your overall assortment doesn’t matter to the individual customer — only the assortment of items that fulfill the above criteria.

If you have too few products in this family, you might lose the sale. But having too many will lead to cannibalization (and overstock).

By grouping products into families of similar attributes, you’ll have a much more agile method to manage and track their assortment, which can help avoid product cannibalization and gaps in the assortment which form in-season.

3.  Account for changing consumer behaviour and preferences

Change is the only constant in retail.

Consumers’ tastes in fashion change with the seasons and where they shop changes over the course of years. Failing to build consumers’ shifting preferences into your assortment could undermine your business in the long term. 

Rather than guessing at the next big change, which has proven to be detrimental for giants like Blockbuster and Toys R Us, modern retailers use science and technology to monitor consumer behaviour.

For example, modern machine learning technologies allow for the collection of data from Social Media to be integrated into the analytics process when developing an assortment strategy.

4. Employ specialized tools to plan your assortment

Once the retailer has a clear assortment strategy in place, it is time to do assortment planning, which means a more in-depth look at the merchandise assortment.

This planning will define which products, variations, styles, sizes, etc. need to be stocked at each individual location in advance.

The technology of retail assortment planning has evolved far beyond traditional spreadsheets. Optimizing the assortment of a 1,000-store retailer that carries 10,000 SKUs requires deeper analysis than any spreadsheets can deliver.

Specialized assortment planning software evaluates per-SKU, per-store assortments based on dozens of product attributes.

A fashion retailer, for example, with shelf space for 17 SKUs of jeans can optimize the combination of brands, colors, and styles that are best for each location.

Analyzing data in your retail assortment strategy will help optimize in-store and online retail businesses.

5. Analyze your data carefully before committing to an assortment plan

Without the right tools, retailers rely on educated guesses, gut instincts, and rules of thumb.

However, data often contradicts attempts at instinctual planning. Stocking your outlet stores with cheaper versions of what your mall locations carry ignores the different nature of each location’s customer base. 

In most cases, retailers will bring in some sort of process that often involves using historical data in an excel spreadsheet and implementing lots of formulas. But with merchandise numbering in the 10,000s, this process is cumbersome, slow, and prone to mistakes.

Sophisticated retail organizations now use advanced analytics software that leverages machine learning and AI technology to use historical data, actually account for product families and understand buying patterns at each location. 

This means that the software can identify the store’s optimal assortment so that retailers can use data to confidently decide which product families to expand or shrink in specific locations. 

Creating an assortment strategy must be the focus of your planning

A retailer needs to take into consideration how deep and how varied their assortment is when determining what kinds of planning tools they should invest in.

A successful plan hinges on a clear and effective assortment strategy.

Best-in-class retailers gain a market advantage by creating effective assortment strategies. By leveraging advanced analytical planning tools, they clearly lay out the mix of products and quantities to carry in each location that will produce the biggest return on their investments. 

Even when best-laid plans fail, advanced analytics software can adjust everything including inventory levels, sales, markdowns, rebalancing a large assortment and so on. The only facet of the planning process that cannot be adjusted in-season is the assortment strategy. 

To discover how retail AI can automate the assortment strategy process, speak with a retail AI Expert today.


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