A definitive guide to a strong product portfolio. Running a strong, profitable retail business is about the art of buying and selling of your product portfolio. This has been true of the nature of retail for the past hundreds of years. The abundance of ecommerce businesses has nothing new to add to this paradigm.
So it doesn’t matter if you sell fashion, groceries, petfood, or wine, all ultimately will face one challenge – to set up a strong wide product range to be attractive to the customer, keep prices competitive, and maintain a profitable flow of your site.
A strong portfolio can be (and should be!) calculated. After spending decades working with the largest retailers on the market, we have gained a knack for creating product portfolios that last.
How to create an ABC analysis
You need to start with the basics, which is creating an ABC analysis. This technique is used to understand better which products in your product portfolio are your cash cows and which products are slowing your business down. Create a complete list of all your products on offer. Each item has to be a unique inventory number with its unique geographical position (or point of sale). So a shirt in 5 sizes, 3 colors and sold in three different branches is a matter of fact, 45 lines in your product list.
Now sort the table by sales, and your ABC analysis is almost ready. Make a line on 80% of sales, and anything above are your top products. Your most frequently sold products, which create the bulk of your business. Now make a second line above products from the bottom, which are not sold at all, or with very little frequency. Anything below this line is your inventory trash and needs to be delisted from your offering.
Most of your products will be in the middle of these lines, creating the bulk of your offering. These products make the size of your portfolio, which is essential for customer satisfaction. If you would distribute your products on a graph, it would look something like this:
The As (cash cows) are only a few, but create the majority of your cash. These are your top products, keep them available at all times, and put them on the homepage of your site. The Bs (or Chasers) are only sold every now and then, but as a whole, still play a role in your total sales. The Cs are complete Losers. Get rid of these, stop selling this stuff; it’s only eating your money.
And now the story gets interesting. Because there are several ways on how you can sort your products in the table described above. The way you sort the table directly reflects the type of businessperson you are and the values you have. Let’s get into the details of the four most commonly used types of product segmentation and what they mean for the business and the customer.
Sorting products by sales amount measured in cash
This strategy puts value on products that create the most sales measured by the absolute amount of cash, regardless of their margin. This strategy is suitable for low margin businesses that live on large amounts of sales. Typically this strategy is used by companies that operate in popular product markets. Think of food, for example. This strategy is good for the consumer and not so good for the owner. Businesses, which chose this strategy typically enjoy high popularity among customers.
Sorting products by sales margin
This product segmentation strategy puts the most significant value to products that create the biggest added value. Sorting products by the sum of the sales margin typically puts upfront niche products that are hard to find elsewhere and don’t necessarily sell in large amounts but make a lot of profit.
Businesses that use this strategy usually have a little extra on the offer, like service, advice, or other added value. The customer chose their stores because they offer goods which are somewhat complicated and unique. Think of a furniture store.
Sorting products by sales amount measured in pieces
This strategy focuses on products that sell the most. Regardless of their price or margin, the products which sell in the highest amounts are treated as the most valuable for the business. This strategy is suitable for a company which offers an abundance of goods and services to their customers. It’s the “we always have what you need” philosophy of money-making.
This strategy is cash intensive and inventory intensive, but it set you apart from the competition. Think of a gardening shop.
Sorting products by sales frequency
This portfolio values product which attracts customer often. It doesn’t matter if the customer comes and buys one piece or five pieces. What counts is how often customers come to buy. This strategy is especially helpful for businesses, which checkout shopping baskets with multiple items. The logic is to attract customers on frequently sold goods and sell the other stuff along the way. An electronics merchant would be a typical example of this strategy. You come to by a charging cable and leave with a flat TV.