Risks of an inadequate product range strategy
For retailers, the formulation of a comprehensive assortment strategy is a decisive success factor. Without the creation of clear product range focal points, it is not possible to create one’s own retail profile from the customer’s point of view. If this profile is missing, there is also a lack of clear positioning in the market and vis-à-vis competitors. This represents a major risk for sales success. For example, many department stores have not succeeded in conveying to customers an assortment competence in profile categories – the reason for shopping in a department store is not evident enough.
At the same time, managing the profitability of the assortment is becoming increasingly complex due to the large volume. The decision per SKU (Stock Keeping Unit – individual article number of a product) whether or not to include it in the assortment can only be made efficiently with the help of a strategic framework. Moreover, if the assortment is not managed from a profitability perspective, a lot of untapped sales potential Is missed.
For the above reasons, every retailer should think about its own assortment, product groups and their different roles.
Different roles of the material groups
A clearly defined strategy and the formulation of its profile from the customer’s point of view are elementary for the success of a retailer. Only when this basis has been established should suitable roles be defined for the various categories in the assortment on the basis of customer purchasing behavior. These roles determine which category has which priority in the assortment structure. In Category Management, a distinction can be made between different roles with different functions:
Profiling roles are the groups of goods that aim to stand out from the competition and with which to attract customers. They are the main reason for customer visits. For this reason, they also take up the most resources, even though they often account for only a fraction of the product range.
In classic food retailing (in this case full-range retailers), the fresh produce section usually has the profiling role: the selection of fresh fruit and vegetables stands for a general food competence, can be attractively staged and is therefore allocated a disproportionately large amount of space, usually directly in the entrance area of a supermarket.
Mandatory roles are all those product groups that customers expect to be part of the assortment when they visit a retailer. In the case of food retailing, this includes everyday goods such as milk, butter and sugar. These product groups usually take up the largest part of the assortment (50-60% of SKUs) and usually have low trade margins, as this is often where the greatest competitive pressure prevails.
Supplementary roles are usually product groups that lead to impulse purchases by customers. Good margins can usually be achieved here, as shoppers usually do not have any price knowledge either. In food retailing, for example, these include products that are offered on the shopping conveyor belt, such as batteries, sunglasses or the like.
The seasonal role, on the other hand, is typically taken by promotional merchandise that is only carried temporarily. Here, too, spontaneous purchases are typically targeted. Classically, these are items for Easter or Christmas, for example.
Formulation of product groups from the customer's point of view
It is important to always define the roles from the end customer’s point of view. The same product group can play a different role at one retailer than at another – depending on the retailer’s profile. For example, facial creams can be found in the supermarket, but only focused on a few successful items. It’s different in the drugstore, where the facial care shelf can include about 1,000 items. The reason is the customers: They come to a drugstore with different expectations of the assortment than they do in the case of a supermarket. Accordingly, the categories have different roles.
Function of the roles from a sales strategy perspective
As a retailer, you always have to ask yourself what you want to be perceived as on the market. If you are positioned as a discounter, for example, pricing plays a very important role. A wide range of products, i.e. offering many different categories, is important in order to cover the needs of the consumer. The focus on a few articles per category (low assortment depth) enables a competitive cost structure and characterizes the discounter’s assortment policy with an average of 2,000 to 3,500 articles on offer. By contrast, a range of around 12,000 articles is the average for full-range grocery retailers.
In the B2B sector, similar questions arise, although the focus is much more on specialist retailers. Here, it is essential that the product group that fits my company’s main value proposition is considered via appropriate profiling roles.
This is where the most resources must be deployed and the most extensive product range possible has to be offered. This can be achieved by offering many different brands and manufacturers in different price ranges and, if necessary, even placing additional private labels.
Example: Assortment strategy in the B2B area
If you are a dealer of ladders for craftsmen, it should be possible to select ladders from different manufacturers, in different heights and materials (wood, aluminum, etc.) and different designs (folding ladder, extension ladder, etc.). Dropshipping models (dealer orders only when an order is received, and his supplier delivers directly to the end customer) offer options here to offer enormous depth of assortment.
The profiling and the mandatory roles
The profiling role here usually takes one or more subcategories of a product group, while the others can be attributed to the mandatory role. For example, steel ladders could belong to the profiling roles whereas wooden ladders belong to the mandatory roles.
Supplementary roles can be taken by product groups that are added to the customer’s shopping cart for convenience during the shopping process (for example, at checkout), but which were not the original reason for the customer’s visit. In our example of the ladder retailer, these could be, for example, work shoes or other items of personal protective equipment that could be useful when using ladders.
Seasonal merchandise groups can be used here for promotions or promotional merchandise. Examples of this could be bundles available at short notice from manufacturers or volume discounts (e.g., 3 for 2).
Function of the roles from the point of view of profitability
The profiling role is usually not suitable for generating the largest trade margins. Here in particular, the goal is to set oneself apart from the competition by offering an attractive price/performance ratio. Here, it is important to differentiate with clear price rules and, if necessary, to avoid comparability by offering additional services. However, the advantage of a high assortment depth could be that certain articles are difficult to compare and are only available from very few competitors. Therefore, higher margins can usually be achieved here. The situation is similar with private labels, as the retailer has complete control over pricing.
The lowest margins are usually found in the area of mandatory roles. The exception here is once again private labels, which can escape the comparability of the competition. Nevertheless, due to the significant turnover of goods, the mandatory role is very important in the margin analysis and articles that do not have a positive impact on the contribution margin may have to be discontinued.
Both supplementary and seasonal goods traditionally have the largest trade margins. Here, unplanned impulse purchases are frequent, and customers make fewer comparisons.
Consulting projects with a focus on product range strategies
Roll & Pastuch already has extensive experience in the development and implementation of assortment strategies:
- New prices for an e-commerce retailer (B2C) for the entire product range
- Pricing strategy of specialized multi-channel B2B retailer with extensive assortment (>100,000 SKUs)
- List pricing for B2B retailers in the social economy with item roles
Optimize your assortment strategy
The role concept is therefore a useful tool for profitable category management. Not only can it be for assortment management (inclusion versus discontinuation), it can also be used from a sales and pricing perspective making it a powerful tool in retail.
We will be happy to assist you in developing your assortment strategy and defining your role concept. If you have any questions or require further information, please do not hesitate to contact us.