Improving Sales and User Experience: How to Use the Category Tree in Retail?
A category tree is a category management method that organizes the assortment of products in retail points of sale. It is used to group products into logical categories, simplifying selection for shoppers and contributing to increased sales volumes. In this article, we will explore how the category tree works, its advantages, and how it enhances management strategies.
How Do Customers Make Purchase Decisions?
In traditional category management, the concept of the “Customer Decision Tree” is common—this is a tool or model used to analyze and understand the thought process consumers go through when choosing a product. At its core, the model is based on the idea that customers go through specific stages and make a series of interrelated decisions while shopping.
For example, when selecting products in a supermarket, a consumer may:
- Check information about discounts, promotions, and sales.
- Ensure that the chosen products meet expectations regarding ingredients, price, and expiration date.
- Evaluate alternative options from other brands, paying attention to volume, price, and quality.
- Make a choice based on their own needs and budget constraints.
This seems logical. However, the main drawback of the Customer Decision Tree is that consumer actions in real life are not so predictable. Some customers consistently buy the same products, while others make impulse purchases (for example, due to hunger or attractive packaging design), and some may add a specific product to their cart because another shopper chose it beforehand.
Another significant drawback is the reduced awareness of products among customers due to the substantial expansion of assortments and the emergence of new products. When the concept of category management was first forming, the main area of fast-moving consumer goods (FMCG) was quite limited.
As a result, shoppers could describe a clear model and criteria for their choices. Nowadays, customers cannot possibly know the characteristics of thousands of SKUs in a store. Therefore, understanding the decision-making model has become much more complicated. Thus, the modern Customer Decision Tree focuses on studying consumer behavior and the decision-making process, which can be useful for developing marketing strategies and market analysis.
We propose to build a category tree: an algorithm that will guide the customer in-store to make the necessary decision. Additionally, it significantly facilitates management processes. Let’s explain what this is and what tools can be used to create effective structures.
What Is a Category Tree?
In retail, the term “category tree” can be characterized as the structure of the assortment created by a category manager to facilitate management. This involves normalizing the quantity of products in each category and filling it in such a way as to meet potential customer needs within the store format.
The category tree can conceptually mirror the customer decision tree. This can be illustrated by considering a customer’s choice of tea:
- Type of Beverage: The customer determines which tea interests them: black, green, pu-erh, etc.
- Brand: Choosing a specific brand: Lipton, Twinings, Tazo, etc.
- Brewing Method: In a teapot (loose tea), in a cup (tea bags), etc.
- Type: Large leaf, medium, small, fine.
- Additional Characteristics: Pure tea, with flavorings, with fruit pieces, etc.
When constructing the tree, the manager will follow similar principles: categorize a group of products under a main category and then divide them into subcategories based on purpose and characteristics.
It is important to note that the category tree is not an end goal in itself. In fact, analysis can be performed on products by categories and subcategories, but products can also be analyzed based on their characteristics, even without utilizing categories.
Sometimes, analysis at the levels of the category tree hierarchy is conducted because product characteristics are not sufficiently highlighted or are not included in separate product fields. In such cases, when reviewing information, it can be difficult for a specialist to determine exactly what product is in front of them. This emphasizes the importance of proper category and assortment management for the effective functioning of a business.
Formation of the Category Tree: Main Stages
To build a product assortment structure, the following steps should be taken:
- Identify Product Directions — the largest blocks. These can be formed based on the retail format. For example, for a convenience store, they may include “Groceries,” “Beverages,” “Household Goods,” “Personal Care,” “Children’s Products,” etc. Within these directions, subcategories can be created.
- Group Substitute Products (similar items) or Complementary Products (for joint use) into categories. For example, within a category, spaghetti, farfalle, and penne (substitutes) can coexist, or spaghetti and pesto sauce (complementary options).
- Determine the Structure of Categories based on the type of retail outlet. It should be noted that there are no universal rules; each case is individual. For example, in the “Facial Skin Care” category at a convenience store, there might be a cleansing gel and a moisturizer. In a supermarket, this would be supplemented with toner and eye cream, while in a drugstore, there would be scrubs, masks, foams, and mousses.
Rules for Structuring:
- Form up to five levels of hierarchy. It’s better to rely on the purpose of the products, asking the question: “For whom/what is it designed?” For example, home textiles: for what purpose — for decoration (napkins, mats), for sleep (bedding, blankets), for the bathroom (towels, waterproof mats). Then you can move further: for example, bedding may be for adults and children, made from cotton and silk, etc. It’s important to avoid excessive detail: when product classification reaches a level where each item becomes a separate category. Instead, products with common characteristics can be grouped in one category.
- Do not create categories of vague purpose. This refers to groups like “Miscellaneous,” “Dead Stock,” and so on. General terms do not help consumers understand what products they will find inside. Furthermore, it is difficult to establish sales plans and develop effective planograms for such categories. It is recommended to create specific subgroups, even if they contain only one SKU.
- Link product characteristics to sizes, materials, brands, styles, etc., at the level of general characteristics displayed for all or several categories. This simplifies the process of analyzing product performance, and users can easily study sales metrics for specific product groups.
- Achieve maximum alignment between the actual grouping of products on the sales floor and in the classifier.
What Does a Category Tree Provide to Retailers?
It is an extremely useful tool in category management that helps:
- Group products in the way that shoppers search for them.
- Plan categories, as the tree helps understand how many SKUs should be in each segment.
- Identify which subsegments are in the highest demand and understand which products should be developed.
- Determine which products and offers should be directed to specific customers to increase the effectiveness of marketing campaigns.
- Understand which products compete with each other and how to strengthen the positions of specific products.
- Identify which products substitute for each other in the shopping cart, understand cannibalization processes, and optimize the assortment.
- Find demand boundaries for optimizing the assortment and increasing sales.
- Understand consumer needs. For example, several products in a category may sell poorly, but they satisfy the needs of a specific group of customers. Analyzing the category tree helps identify such segments and consider their needs when planning the assortment.
Why Is This Important for a Category Manager?
With the help of a category tree, a specialist can understand how a product fits into the structure and the overall portfolio: whether all segments are covered and whether an effective shelf is built according to the Customer Decision Tree.
In the context of a category strategy, this will help to:
- Manage the customer experience.
- Identify purchase frequency in each segment.
- Analyze which specific segments interest target groups.
- Draw conclusions about the potential of segments in terms of volume.
Additionally, the category tree provides the opportunity to assess how optimally the assortment is structured, including identifying gaps, eliminating product duplication in clusters, and finding opportunities for optimization.
Thus, the category tree:
- Can be used as a tool for managing the assortment in retail. The result is the organization of products into logical categories and subcategories, simplifying control over the assortment and the assignment of roles.
- Allows for the creation of a product hierarchy. The result is easier identification of each product’s place within the assortment structure.
- Helps manage the assortment. The result is maximum focus on products, their structure, and organization.
- Enables determining the volumes of products for different categories. The result is simplified inventory management.
- Simplifies analysis by category. The result is easier assessment of effectiveness and comparison through grouping products by similar characteristics.
How Often Should the Category Tree Be Updated?
Here are six reasons to update data in the category tree:
- Changes in Consumer Needs, Trends, and Production: The emergence of new products, categories, or solution segments requires a mandatory review of the tree.
- Seasonal Business Specificity: In such cases, data should be updated before each season.
- Adhering to a Schedule: Even if there are no significant changes, it’s better to maintain competitiveness and relevance of the assortment: once a quarter, every six months, or annually.
- Monitoring Data: Information about customer activity, feedback, and other factors may indicate the need for changes.
- Business Expansion: If a new direction is introduced, the manager needs to adapt the category tree accordingly.
- Competitor Activity: Changes in competitive strategy or the introduction of new products affect the need to update the category tree.
Methods for Building a Category Tree
Creating a category tree is a complex and multifaceted process that requires deep analysis and understanding of customers, as well as consideration of internal and external factors. This task aims to achieve three main goals for retailers:
- Building long-term loyalty.
- Maximizing profit.
- Providing customers with the opportunity to make the right choice.
One of the key aspects of building a category tree is segmenting customers and studying their needs. Analyzing customer choices helps managers create a category structure that aligns with the needs and desires of target groups.
The construction of the category tree also affects product placement on shelves and determines which products will be available to customers.
There are at least two methods for obtaining and structuring information for effective distribution of products into categories and subcategories.
Survey Method
This method is based on active interaction with customers through interviews and questionnaires. During this process, it is important to gather information about preferences, needs, and decision-making logic. For example, when considering the “Coffee” category, this method helps understand why customers choose a particular grind, brand, weight, packaging, etc.
Analysis of Precise Purchase Data
This method helps reveal trends in customer product choices, as well as identify popular products and their combinations. Using this data, a tree can be created that reflects current needs based on consumer behavior.
Customer Journey
If a retailer has an online store, this method can be utilized. It focuses on better aligning products and services with the customer interaction journey with brands. This facilitates the search and selection process at each stage. The standard steps are as follows:
- Identifying the stages that customers go through from the beginning of their interaction with the brand to the completion of the purchase.
- Categorizing products and services according to each stage.
- Dividing each category into subcategories for greater detail.
- Considering customer needs and questions at each stage.
- Continuously updating the category tree in accordance with changes in customer behavior and needs..
How Does ABM Assortment Help in This?
The ABM Assortment tool from ABM Cloud can be used to build a decision tree. It offers a wide range of analytical features:
- It allows for dynamic updates to the decision tree based on changes in customer behavior.
- It provides a range of tools for assortment analysis. This helps determine which products should be added or removed from the assortment.
- It tracks the results of changes in the assortment to understand whether the implemented changes were successful.
For example, let’s consider the “Clothing” category. We can use ABM Assortment to explore the following factors:
- Are there products of different price ranges in the category?
- What clothing styles are represented in the category?
- Which products are popular during different seasons?
- What age group of customers is most interested in the products in this category?
Based on the analysis of these factors, a decision tree can be constructed. For instance, if it is found that there is a lack of products in the mid-price range, consideration can be given to expanding the assortment.
The category tree helps organize products for consumers and simplifies their selection process. It is an important tool in managing product assortments. However, it is not the only one. The combination of the Customer Decision Tree and the category tree helps maintain a relevant product assortment, achieve better category performance, and improve the customer experience. Implementing these and other approaches can be a key factor in the success of retailers.