How to identify ineffective products and predict the level of sales

Assortment formation is a task that should take into account several important factors. Among them - the factor of profitability of a particular group of goods, as well as an indicator of how often customers need a particular product. ABC and XYZ analysis, as well as their combined version, will help to analyze your assortment taking into account these conditions. Clever Fashion experts explain in detail how to use these analysis methods to make your assortment as effective as possible.

Which product is more important

In order for the consumer to find his product, he needs a wide choice. But too large an assortment depresses the ability of the buyer to choose meaningfully from what is offered. Unlimited choice is the same as not having any choice. In addition, the "bloated" assortment entails unjustified costs: for logistics, warehouse maintenance and unsold leftovers. The analysis and management of the store's assortment policy will help to solve the problem of forming the optimal assortment. What to put on store shelves? Which product to bet on and which one to exclude from the product range?

Consider one of the most common assortment formation methods - ABC analysis and XYZ analysis. Possessing the methodology of these two simple means of analysis, you can significantly increase the efficiency of the assortment policy by offering the client the product that he needs and increasing the company's profit due to sales growth.

ABC analysis allows you to classify the resources of the company according to their importance. It is based on the Pareto principle, which can be formulated as follows: "80% of the effort is responsible for the 20% of the effect." In practice, this principle means that only a small fraction of all goods (20%) makes the maximum contribution to commodity circulation (80%). The essence of ABC analysis is to divide the goods into three categories according to the degree of their influence on the overall result:

Group A is a strategic group. These are the key products that make up 5-20% of the assortment, but they account for more than half of the sales and almost all the profits.

Group B - intermediate goods. These products account for between a quarter and a third of sales, but they hardly make a profit. Group B products can range from 25 to 60% of the product range. Together with group A, they provide up to 80% of all sales.

Group C - the least valuable goods. They account for an insignificant part of sales, and their service may cause the company a loss. Group C products comprise from 20 to 60% of all products, and usually form the largest group.

Note that individual products are grouped by profitability per unit of output, and product groups are determined based on the gross revenue of the group. Dividing the product in this way, it is necessary to determine the marketing programs for each of the selected groups, focusing on sales indicators and target consumers of each category. Group A requires the main attention and care: loss of competitive advantage with at least one product from this group can seriously damage the success of the store. Group B also needs attention: the purpose of working with this group is to transfer products from category B to category A and prevent them from falling into group C. Clever Fashion analysts advise to refuse products from group C altogether, but recommend doing this only after an in-depth analysis , after all, having eliminated part of the assortment, you can lose the client. Constantly study group C for whether it makes sense to find each specific product in the assortment line, and whether something can be done to transfer it to group B.

ABC analysis is an empirical law, true not only in relation to assortment policy, but also in relation to other business areas: 20% of customers bring 80% of all revenues, 80% of effort and time is devoted to creating 20% of all products. In general, it is true that 20% of all efforts bring 80% of all results.

What the coming day prepares for us

However, not all so simple. The assumption that Group A and B products are capable of providing 80% of profits can lead to a serious planning error, especially if you do not analyze the sales stability of these commodity items. And since we are talking about the shoe business, where seasonality of sales is a significant factor, Clever Fashion recommends conducting an XYZ analysis together with ABC analysis. It allows you to evaluate the stability of sales by product groups and to predict the nature of consumption in the future period.

During the XYZ analysis, the goods are divided into three categories:

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Group X - products that ensure stable sales,

Group Y - sales are unstable, but there are known trends in determining the need for them,

Group Z - resource consumption is irregular; trends in demand are difficult to trace.

As a result of the XYZ analysis, for example, the following can be revealed: slippers or model shoes are sold stably throughout the year, with slight fluctuations in demand, but bring small gross revenue. They can be attributed to group X. The category of goods Y has a pronounced seasonal nature of demand, while making the largest profit in current periods. This category includes winter, demi-season shoes or open sandals.

Having information on the results of two types of analysis on hand, the question arises: what products should be focused on? Given that ABC analysis does not take into account the stability of the process of purchasing goods by customers, and XYZ analysis does not reflect the profitability of a particular group, a compromise is needed between these two methods. And he is! In order to fully analyze the situation and manage the stability of purchases, a method has been developed that combines ABC and XYZ analysis. This combined analysis can be carried out both in relation to customers to create the most effective marketing programs, and in relation to product groups. The combined analysis can give an almost complete picture of the effectiveness of the selected assortment policy.

In this method, according to the ABC analysis technology, the markup for various goods from the price list is ranked, and according to the XYZ technology, the turnover of warehouse stocks for these commodity groups. The result of this combined analysis is not 3, but 9 groups. For clarity, use the table (see figure "Analysis ABC & XYZ"). The table shows that AX products are sold quickly and profitably, while AZ products require a more careful approach: perhaps the reason for the insufficient demand for them is a high margin, which slows down the sale of this product. This means that the error lies in the wrong choice of goods for purchases, or in its positioning. You can also identify the undisputed leaders (group AX) and outsiders (CZ). Having determined which products bring the least profit and are needed by the consumer least of all, it is worth understanding how to proceed with them further. Clever Fashion specialists recommend purchasing Z-grade goods with the utmost caution, and just be careful about X-grade goods, the stock of which may be in the store.

ABC and XYZ analysis complement each other perfectly. And if ABC allows you to assess the contribution of each shoe model to the sales structure, then XYZ makes it possible to assess the fluctuations in demand, identify seasonal factors and develop special promotions for the sale of specific product groups, as well as determine the optimal value of stocks for certain goods. 

Matrix for beginners

The considered methods are applicable only if the company already has information on the profitability of the product, the nature of demand, inventory turnover and the number of unsold balances. Reliable data containing the necessary information appears after several accounting periods. But if there is no such information yet and the company is just starting its work, the question arises - what data to rely on in this case?

The answer is to make maximum use of external sources, the accumulated experience of players in the chosen market, and marketing research from consulting agencies. Let's say we're opening a shoe store. First, you need to clearly define the target customer. Who will your store cater to? Will it be for families with small children who need to find shoes for everyone in one place, for young women who follow the latest fashion trends, or will it be a strictly men's store offering elegant classics for successful men? Understanding your customer will determine the appropriate staff, the preferred product range, and the pricing policy that will be most acceptable. Also, based on this, you should consider the store's positioning: location, design and color scheme, the layout of retail equipment, and advertising efforts. Respect your customer. Spend time in the store, and the customer will be able to suggest beneficial solutions and correct any shortcomings.

What factors should be taken into account when planning the first and subsequent purchases of goods? The following are taken into account: size range (special attention is paid to the most “running” sizes in a given region of residence), style, color, material, and functional purpose. It is necessary to think over the correlation of the basic and fashion collections and the policy regarding them: for example, some stores never make discounts and sales on models of the basic collection, or on the manufacturer’s iconic models. The balance of the assortment in the directions is also important. For example, it can be distributed as follows: a small part of the nomenclature is occupied by trendy trend models in the current season (5-10%), slightly less than half can be fashion goods (35-45%), the rest of the assortment will be made up of basic models (50-60%) . At the same time, up to 70% of the assortment will be typical for the current season, the rest of the models will represent model, sports or domestic shoes, which are in demand regardless of the season. 50% of the assortment will be presented in the classic color scheme, up to 40% of the goods are presented in brighter colors and textures, and the order 10% of all models should contain iconic color schemes, the most fashionable this season.