There is no cookie cutter set of rules for setting up classifications, but there are guidelines that should be considered. You want to design the hierarchy so that the classifications are of use. You will want to create classifications that will allow you to generate data that will help sales projections and manage inventory.
Consider your special needs; do product labels need certain information printed? Categories (or styles) may need to be used to accommodate these needs.
How do you set out to define classifications?
What is the role of classifications to the retailers, are you using it primarily for reporting and inventory or do you plan to build demographic and marketing considerations around it.
A key component of good Category Management is data analysis, therefore having an understanding of how you want to analyze your business is key.
Questions to consider are:
- What kind of performance analysis will you do on product mixes (is it based on some disparate relationship… say for example high cost goods may be one department). Combining the gold plated flip flops with the Rolex. This isn’t a traditional union of products but the retailer may have a business reason to look at all high ticket items as a unit and create a department of high end items.
- Does you have any performance analysis that is based on ROI etc that needs to be considered (Seasons, etc)
- The use of classifications to work in tandem with marketing strategy is key, where a full line of products (instead of the individual products or brands) is managed as a strategic business unit (SBU). In practical retailing situations, demographic or marketing considerations may take precedence. For example if they are a sporting goods store and 75% of their business is done with local baseball leagues, they may want to perform substantially more detailed analysis to baseball products than a traditional sports store, their departments should reflect this.
Rule of 10/10/10
To make the filters manageable we recommend that you follow the rule of 10/10/10; no more than 10 choices in department, category or subcategory.
Establishing your classifications as best you can is important because it helps you achieve what we in the cloud call MSIB: More Stuff in the Bag to your customers.
This is the most general segmentation of the product in your inventory; it can be based on gender/age (men, women, youth, and toddlers) or by product (instruments, accessories, clothing, parts, and books).
Typically, a department runs like a “mini-business” in its own right, managed by the retailer and/or suppliers, with its own department turnover and/or profitability targets.
Typically there should be no more than 10 departments in a product mix, anything more than that makes it cumbersome for a small retailer to manage. Try to refrain from having departments that account for less that 5% of your total sales or inventory.
What is a Category?
A ‘category’ is usually defined as “a group of mutually substitutable items.” So for example, for cleaning teeth, I could use Crest or Colgate toothpaste to do the same job. Therefore, both products could be considered as being in the Category “Toothpastes” since they are mutually substitutable. Customers find the products interchangeable within the category but not typically from one category to another.
Products can be “related” and not just directly substitutable. Beverages that are on shelves (sodas, juices) and chilled beverages (milk, carton juices), may not be physically on the same area of the store, but are closely related.
In terms of helping generate sales – categories should be set so that a coupon or discount can be applied to all in the category, for ease of implementation. Various reports can be run to further analyze effectiveness of the marketing campaigns, based on categories.
As a side note: The relationship between retailer and supplier is moves to a more collaborative nature with more openness and sharing of information. Importantly, suppliers are expected to propose actions (eg new products, or promotions) only if they add to the total category sales and the satisfaction of the shopper.
Subcategory (and style, size, color)
Subcategory can be used in one of two ways. It can either be considered basically a category 2 (additional categories) or as a further delineation of categories . Typically, it is not useful to assign groupings that make up less than .5% to 1% of your total sales. As the retailer can define style, color, and size, you does not have to use one of the attributes to define these. Depending on the business and the need for further identifying classifications, subcategory can be useful for the retailer.