Retail reality 

Boost you margin with ruled-based merchandise

ust like in your physical shop, you’re aiming for the highest possible profit margin for each product in your webstore. Merchandisers set up their shop displays in such a way as to create a perfect balance between new (and popular) products and those items which are more abundantly in stock. This gives the customer a great one-second overview of the items you’re looking to sell. In a webstore, however, this isn’t as straightforward.

In the online world, we’re getting better and better at guiding the shopper straight to the right landing page, meaning that the home page is often skipped as the first point of call of the website. This is good news, because the fewer the clicks, or the faster we get the shopper to the check-out, the bigger the conversion per webstore visit. The homepage, therefore, is displayed less often and the overall picture, like we have in the physical store, disappears. What’s more, we can usually only fit up to 8 items on the product page of a webstore (above the fold), and so you actually lose a lot of direct hotspots which you have in the physical store. Although the fold is becoming an ever-smaller hurdle, we’re still seeing an increase in the number of clicks and sales above the fold. The 8 items that are placed there have to become your bestsellers!

Rule-based merchandising

But how do you figure out which items are the best ones to place above the fold, which ones to position just below the fold and which items below that, and so on, and so on. Are you going for margin makers or for stock fillers? And what if one of the items below the fold suddenly turns out to be a bestseller that everyone comes to your webstore for? Does this product shoot to the top of the list or do you just let it be?

In many cases the merchandiser still choses the product sequence manually. But this means you’re missing out on more profitable margins, for the simple reason that it’s impossible to create the perfect allocation of over 20,000 products every single day. Let alone doing this several times a day, or even an hour! While the better and faster this is done, the more margin can be made.

Rule-based merchandise offers the solution to this dilemma, enabling you to link a dedicated system to the available inventory in your webshop. This kind of system doesn’t come cheap, but they generally make up for it with an excellent ROI! One program might achieve slightly better results in certain areas than another program, but on the whole, rule-based merchandise works on the same principles.

Which parameter do you attach the greatest value to?

In rule-based merchandising, the whole idea is to bring everything back down to a single figure for each item category. This enables the system to make an arbitrary choice on what product gets what position on the product list page, or is valued as an item for upselling on the detail page.

It’s up to the merchandisers and the retailer you want to be in order to determine which values are given to which parameters. If you want as little stock as possible, then those items with high inventory levels are given a higher ranking. The more the stock level goes down, the lower the ranking. Perhaps as a retailer you want to stay on top of the latest trends. Then you can rank the brochure items and latest designs highest. Or do you want your high-margin items to come out on top? Then give them the highest score and watch your margins soar. You can also base the ranking on the completeness of a size chart, so that items that are already sold out in a number of sizes are displayed less prominently. The more complete the size chart, the higher the ranking.

When all the parameters are provided with a valuation assessment, the software uses artificial intelligence to determine which items get the highest ranking. The system then makes sure the ranking is updated every hour (or whichever time interval you choose).

Although this is just a small step for rule-based merchandising, it’s still a huge leap for retailers. Most retailers, if they find time to do so, use relatively straightforward systems whereby the amount of clicks and sales of the online items determine the ranking. This is a good start to reach the first level of margin optimisation, but if you scratch a little deeper there’s still plenty of gold to be found.

 

What will the near future bring us?

Once you seriously get to work on rule-based merchandise, the possibilities are endless. The steps that still await us, and we’re expecting these steps to be taken sooner rather than later, are real-time stocks and merchandising, enabling you to respond even quicker and more personal. Because every visit to the website has its own calculations and recommendation based on customer profile, stock level, previous visits, popularity, purchase history, etc.

Even influences like the weather, or day versus night, can quite easily be incorporated in the systems, which leads to the first customer offer being most relevant. And finally, the systems will look at and calculate which products sell better on which devices, leading to a different ranking for each device. Basics are easier to buy on a smartphone, whereas more complicated purchases are sold more often via tablets and laptops.

Dynamic pricing

Following on from optimising the margins, there’s still the challenge of dynamic pricing. E-commerce has a definite head-start on the physical retailer in the respect. Prices can be adapted more easily and, more importantly, quicker in an online environment, which creates a less transparent pricing image and often a greater sense of urgency. In the airline industry, for instance, nobody is surprised by the daily fluctuating prices. In physical stores, this strategy is a lot harder to implement and there is an underlying fear with retailers that the shopper won’t accept it.

An extensive research study conducted by Kega shows, however, that applying a dynamic pricing strategy in the physical store does in fact have a good chance of success, and that there are enormous sales advantages to be had. This will require an investment in systems, but once the initial expenses have been made, an increase of up to 40% more margin can be attained. This mostly has to do with discounts that are less steep, yet at the same time more personal. Someone who likes a certain brand, but doesn’t want to pay full price, waits for the first sales. But during sales, the size the customer is looking for is often unavailable, which could mean a missed sale. By offering the customer a smaller discount at an earlier stage, but with an in-stock guarantee, the purchase is brought forward, the margin is increased and the customer goes home happy. You can offer such personal discounts using any number of methods, such as loyalty apps, e-mailings or through personalised ESLs.

What can the physical store learn from this?

Dynamic pricing in the shop is only part of rule-based merchandising. It starts to really get interesting when the data that you collected online is shared with the physical stores, allowing the merchandisers to put together a collection that is most popular among retail shoppers. The number of clicks and online sales, together with the in-store stocks, determine which items are given prominent positions in the store. This way you can respond to sales trends quicker and easier. Converting your whole store every week, according to these calculations, won’t yield any added success, but changing some of the sales and discount displays regularly could mean an enormous sales boost as well as margin optimisation. 

Artificial Intelligence vs. Emotional Intelligence

Is it all gold that’s at the end of the rule-based merchandising rainbow? That all depends. Thanks to artificial intelligence, the system will definitely get the most out of the margins, although the system won’t be looking at the brand values of the retailer. For instance, the system might see that the item being bought most often is a pair of socks, so therefore the system will, for the benefit of sales opportunities, always recommend socks as an upsell item. But, as a high-end fashion retailer, you also want to inspire your customer by showing them complete outfits or fantastic mix-and-match item. This strengthens the brand image of the retailer and this also has a certain value that is not calculated by the system. Which product do you ultimately want to show?

Merchandisers have a sixth sense in finding the perfect balance because they work with ‘Emotional Intelligence’. They are able to make a well-considered choice between margin and image. In rule-based merchandise systems, therefore, there is always the option to overrule the choices of the system. And that’s a good thing too, because our customers also have more emotional intelligence than artificial intelligence.

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