The process of dividing a retailer's merchandise mix into distinct groups based on factors such as price, style, or brand, used to inform assortment planning decisions.
What is Assortment Segmentation?
Assortment segmentation is a retail strategy that involves dividing a product assortment into distinct segments based on specific criteria or attributes. Each segment represents a group of products that share similar characteristics or serve a particular customer need.
How Assortment Segmentation works
- Define segmentation criteria: Retailers need to establish clear criteria for segmenting their assortment, such as customer demographics, purchasing behaviour, product attributes, or price points. These criteria should align with the retailer's overall business strategy and target market.
- Analyse customer data: Retailers collect and analyse customer data to understand purchasing patterns, preferences, and trends. This data helps identify commonalities and differences among customers and provides insights for effective assortment segmentation.
- Create segment profiles: Based on the segmentation criteria and customer analysis, retailers develop segment profiles that describe the characteristics and preferences of each segment. This includes factors such as age, gender, lifestyle, product preferences, and price sensitivity.
- Allocate products to segments: Once the segments are defined, retailers assign products from their assortment to each segment based on their relevance and appeal. This involves considering factors such as product features, style, brand, and price to ensure the assortment aligns with the preferences and needs of each segment.
- Develop tailored strategies: Retailers create customised strategies for each segment, including product selection, pricing, promotions, and marketing campaigns. These strategies aim to meet the unique needs and preferences of each segment, maximising sales and customer satisfaction.
- Monitor and refine: Assortment segmentation is an ongoing process that requires monitoring and refinement. Retailers analyse the performance of each segment, track customer feedback, and make adjustments to their strategies and product allocations as needed to ensure optimal results.
By effectively segmenting their assortment, retailers can better understand their customers, offer tailored product options, and improve overall business performance.
Pros of Assortment Segmentation
- Customer-centric approach: Assortment segmentation allows retailers to better understand their customers and their unique preferences. By tailoring the product assortment to specific customer segments, retailers can provide a more personalized and relevant shopping experience. This customer-centric approach enhances customer satisfaction and loyalty.
- Improved sales and profitability: By aligning the assortment with the preferences and needs of different customer segments, retailers can optimise sales and profitability. Assortment segmentation enables retailers to focus on high-demand products for each segment, reducing the risk of stockouts and markdowns. It helps increase sales by offering the right products to the right customers, maximising revenue potential.
- Efficient resource allocation: Assortment segmentation helps retailers allocate their resources more efficiently. By identifying the most profitable customer segments, retailers can allocate their inventory, marketing efforts, and other resources strategically. This ensures that resources are directed where they will have the greatest impact, resulting in better inventory management, reduced costs, and improved overall operational efficiency.
Cons of Assortment Segmentation
- Increased complexity: Implementing assortment segmentation requires retailers to gather and analyse data on customer preferences, market trends, and other relevant factors. This can be a complex and time-consuming process, especially for retailers with a large product assortment or multiple customer segments. Managing and maintaining the segmentation strategy may also introduce additional complexities and require ongoing monitoring and adjustment.
- Potential for increased costs: Assortment segmentation may lead to increased costs for retailers. Developing and maintaining separate assortments for different customer segments may require additional inventory management, marketing, and operational resources. Retailers may also incur costs associated with data collection, analysis tools, and technology infrastructure needed to support the segmentation strategy.
- Risk of overgeneralisation or underestimation: While assortment segmentation aims to offer tailored product assortments, there is a risk of either overgeneralising or underestimating customer preferences within each segment. Overgeneralisation may result in a lack of product diversity and fail to capture the full range of customer preferences. On the other hand, underestimation may lead to missed opportunities and limited product offerings that do not fully meet the needs of the segment.
Below you will find answers to common questions
How can assortment segmentation help retailers improve customer satisfaction?
Assortment segmentation allows retailers to tailor their product offerings to specific customer segments based on their preferences, needs, and buying behaviours. By understanding the unique requirements of each segment, retailers can curate assortments that resonate with their target customers, leading to improved customer satisfaction. For example, a retailer targeting a younger demographic might focus on trendy and fashion-forward products, while a retailer catering to families with children might emphasise practical and affordable items.
What challenges should retailers consider when implementing assortment segmentation?
Implementing assortment segmentation can present several challenges. One common challenge is data availability and quality. Retailers need access to accurate and reliable data to segment their customer base effectively. Additionally, managing and maintaining separate assortments for each segment can be operationally complex and may require additional resources and systems. Retailers should also consider the potential risk of overgeneralisation or underestimation of customer preferences within each segment and work to strike the right balance between customisation and product diversity.