Kevin Hillstrom's Dear Dr. pROfIt: Finding the Optimal Balance in Your Merchandise Assortment
Dear Dr. pROfIt: Three months ago, we introduced a new merchandise line. So far, the new merchandise line is generating $2 million in average monthly sales. However, the remainder of our merchandise assortment, which used to generate $8 million in average monthly sales, is now generating $6.5 million. What happened to the performance of the remainder of our merchandise assortment?
Dr pROfIt: This is a common problem. It turns out that consumers don’t necessarily buy more merchandise just because you offer them more merchandise. Consumers tend to have a “budget,” if you will. In other words, customers are only capable of spending so much on any family of merchandise categories, regardless of how many items or SKUs you choose to offer.
Give this analysis a try: Identify all customers who purchased from your new merchandise line. Quantify how many of these customers are new to your business, and how many are existing customers. Among the existing customers, calculate how many previously purchased from your existing merchandise assortment.
You're likely to find that customers who are purchasing from the new merchandise assortment used to buy other merchandise. When this happens, you have a situation where the new merchandise assortment is cannibalizing your existing merchandise assortment.
In most companies, there's an optimal merchandise assortment. Most companies continually fight the balancing act between selling merchandise that customers have always enjoyed, and offering new merchandise that customers may be interested in. Pay close attention to the future value of customers buying from new merchandise assortments.
If the future value of these customers is improved, then the new merchandise assortment is genuinely helping grow the value of your business. If the future value of these customers isn't improved, then it's entirely possible that the new merchandise assortment is simply cannibalizing existing merchandise. When this happens, management has a tough choice: either support existing merchandise or move into the future selling new merchandise.