Why Category Definition is Critical
For retailers who follow a structured category management review, the first step is defining the category. The idea of defining a category each year may seem obvious – even redundant year after year. But the truth is that customers’ tastes and habits change. A review of trends and changing customer behavior can catch newly emerging opportunities so that retailers and vendors can capitalize on new understandings. For example, a retailer who habitually reviewed away from home beverage consumption as carbonated beverages versus bottled water could overlook the trend for aseptic packaged milk product consumption and water flavor additives.
The implications can transform a retail store depending on whether its management defines their category as DVD Movies or At-Home Entertainment. In one situation, they are locked into optimizing the DVD category alone. In the second, they can evaluate Gaming, Cable Television, Satellite Television, even bar ware! Defining a category is all about drawing boundaries in the same way your customer does. So, a customer will ask their family “Which DVD should we watch tonight?” less frequently than they will say “What shall we do tonight?” Consider the differences in these category definitions: Glues and Paints versus Crafting Supplies, Water Fountains versus Water Features, Party Invitations versus Party Supplies. What should come to mind are the changes in product selection and merchandising in the store that will better anticipate customer needs for these categories.
Category definition needs to be grounded in customer insights that are gained from several sources: affinity purchases uncovered through data mining market basket transactions, primary customer observational research and self-reported customer behavior. Frankly, affinity analyses can be misleading if retailers do not carry a wide enough breadth of product to be a full solution. For example, if a limited assortment grocer did an affinity analysis on birthday cakes, it may discover that the customers also purchased ice cream, paper plates and candles. It could, however, overlook that customers purchased the remainder of their needs (wrapping paper, cards, balloons and invitations) elsewhere. Primary customer observational research is expensive and time consuming. Self-reported customer behavior is notoriously inaccurate.
For most retailers, the most cost effective way to discover unbiased customer insights is to review the customer research of their top vendors along with customer research from emerging niche vendors. Niche vendors are usually the first to recognize and exploit new customer patterns. Established vendors less routinely recognize changes in behavior. Their focus on current product lines and customer segments can create blind spots. Take, for example, the difference between established home cleaning mega-vendors and environmentally-focused cleaning vendors like Mrs. Myers and Seventh Generation in recognizing the growing demand for less chemically-intensive home cleaning products.
For retailers trying to glimpse the future and create a compelling selection that will meet the needs of future customer demand, actively sussing out customer and shopper trends through every resource available is an ongoing endeavor.