Assortment Management

Assortment policy is the most important component of a company's marketing strategy.

An effective assortment management system is a powerful tool for generating stable cash flows, improving the company's market position, and ensuring sustainable business development.

Goals of Assortment Policy

Even the first classic of marketing science, Philip Kotler, said that a company's assortment is too narrow if profits can be increased by adding new products, and the assortment is too wide if profits can be increased by removing a number of products.

The goal of any commercial enterprise is to achieve maximum economic effect from its activities and invested funds. It's no secret that the lion's share of funds invested by a company in its development is directed towards producing or acquiring products that are then offered to consumers in the market. The competitive advantages of the product and its ability to maximally satisfy consumer needs determine the company's market position and its development opportunities.

The modern market is characterized by a number of trends that encourage companies to expand their assortment. A prominent trend in recent decades is the buyer's desire to save time and effort when acquiring necessary goods. Consumers prefer to see the maximum assortment in one place. It is to this trend that we owe the rapid development of hypermarkets and marketplaces in the B2C market.

The B2B market also adheres to this trend. A broader assortment from a supplier allows buyers to reduce labor costs by decreasing the number of suppliers, obtain better prices through volume purchases, reduce transportation costs, etc.

Another trend is the shortening of the product life cycle in the market. Perhaps only the market for essential goods is less susceptible to this trend. Overall, however, the level of competition and constant growth in consumer demands in almost all areas lead to a faster decline in buyer interest in products. Companies are forced to adjust product properties to meet consumer demands and diversify their activities by expanding their assortment.

In such conditions, effective marketing, competent and balanced assortment policy becomes the key to sustainable company development and a business growth point. Any increase in assortment means increased costs, and there are no companies with unlimited resources in the world. This is where assortment policy should play its role, designed to determine the optimal product range that, on one hand, maximally satisfies demand and customer needs, and on the other hand, fits within the company's financial capabilities and resources.

Assortment policy establishes the basic principles of the company's activities regarding markets, products, market segments, pricing, and economic trends. In a broad sense, assortment policy solves tasks such as:

• Maximally satisfying buyer requests.
• Rational use of the company's technological skills and resources.
• Ensuring stable cash flows, improving financial results.
• Reducing commercial risks through diversification of the company's activities.
• Harmonizing the assortment and achieving synergy effects when implementing projects in areas related to the company's current activities.

The company's goal when developing an assortment policy is to calculate and create an optimal assortment portfolio that allows achieving maximum economic effect with given resources. No, even the most advanced, marketing tools and activities can fully compensate for strategic mistakes made when forming the product assortment. In such a case, radical measures will have to be taken.

Developing an Assortment Policy

Assortment policy is a set of principles, rules, and tools through which the company will determine its optimal assortment from the perspective of achieving maximum economic efficiency, as well as methods for bringing the current assortment to the optimal one. This document is used for more than one day and therefore requires close alignment with the overall company development strategy and thorough elaboration of methods and tools.

Planning the optimal assortment is a rather labor-intensive process, built on deep knowledge of market conditions, understanding the actions of competitors, the behavior of one's customers, etc. In many cases, companies lack the necessary resources of competent marketers, so they often resort to marketing outsourcing, especially in research and analytical work.

Within the set of rules, the basic principles in the field of assortment formation are defined, and the reasons and criteria that influence such decisions are considered.

Here are examples of such principles:

• Expanding the assortment by increasing indicators of breadth, completeness, and novelty. For example, during general market consumption growth and increased demand, the need for market segmentation, etc.
• Stabilizing the assortment, typically works in the category of essential goods, less subject to changes in buyer preferences.
• Updating the assortment when necessary to satisfy constantly changing buyer preferences.
• Harmonizing the assortment – this is an approach to forming the assortment based on maximum use of the company's experience and technological knowledge and skills.
• Reducing the assortment when demand or sales profitability falls, or general market consumption decreases.

Furthermore, I would like to draw attention to the relationship between concepts such as assortment and brand. Today, the trend of diversifying the company's brand portfolio is obvious. This is primarily related to the specifics of consumer perception, where a consumer might extrapolate one negative fact to the entire brand line. In such a case, a brand image built over years can be destroyed very quickly. Therefore, to expand the assortment and launch new products to the market, companies increasingly use a new brand. So that in case of any failure, the shadow of negativity does not fall on the reliable and in-demand brand. Besides, having several brands in the portfolio allows for price segmentation and positioning, which is also important in modern realities.

The algorithm for managing assortment in a company might look something like this:

• Sales analysis, assessment of the current assortment from the perspective of target indicators and sales dynamics changes,
• Identification of current and prospective consumer needs,
• Analysis of consumer sentiment,
• Analysis of the assortment and achievements of competitors,
• Development of proposals for changing the assortment,
• Analysis of financial resources and decision-making on changing the assortment.

Some Aspects of Analysis

Sales analytics is a constant companion of the marketer. In addition to the well-known ABC and XYZ types of analysis, marketers use analysis with the matrix proposed by the Boston Consulting Group. The essence of the analysis is to distribute all products in the assortment into four groups characterized by different dynamics and sales volumes.

These groups are named:

• Stars – these are products in high demand showing sales growth in dynamics. Such products need support for sales growth and can potentially increase the company's profitability.
• Cash Cows – this is a group of products showing consistently high sales volumes. Typically, they do not require special investments to maintain sales and allow maintaining a stable market position.
• Question Marks (or Problem Children). This group typically contains products recently launched by the company on the market, showing positive sales growth dynamics with relatively low sales volumes. Potentially, such products can move into the Stars category, but investments are needed to realize this potential.
• Dogs – a group of products at the end of their life cycle. Low demand without positive sales growth dynamics. This category requires increased attention from the assortment policy perspective. Here, a decision needs to be made about removing from the assortment, replacement with an analogue, possibly different positioning, pricing. There are many options.

When conducting such analysis, the question often arises about which indicators of growth and sales volume to take as the starting point. It all depends on the goals the company strategically sets for itself. If the goal is to stabilize its market position, then the average indicators of these parameters in the company are taken as the starting point. In cases where the organization aims to take leading positions, it makes sense to compare oneself with competitors' indicators.

Whatever the starting point, it is important to understand that the assortment should ideally be distributed across all four groups approximately evenly. This helps diversify risks and plan marketing activities in the market in accordance with strategic goals, leaving room for maneuver in case of sharp changes in market conditions.

In addition to "Dogs" and "Cows," in assortment management theory, there are concepts of product roles in the overall assortment portfolio.

Generally, this list looks like this:

• Profit Generators – these are products showing significant sales growth rates and having an increased profit margin. These could be seasonal goods or popular novelties, for example.
• Traffic Builders – these are products with consistently high demand, sales volume for them is stably high and does not depend on seasonality or other factors. Such products are in demand by the company's target audience; their task is to create constant demand among consumers.
• Revenue Generators – these are products well-known to a wide range of buyers and available from almost all competitors. Typically, these are some useful small items or impulse purchase goods. Their task is to create a constant stream of revenue, even if small. Plus, such an assortment category creates an impression of assortment comprehensiveness in the consumer.
• Defenders – these are products offered to consumers at a price slightly lower than competitors or the market average. There may not be many of them, but they are in high demand and create an impression of more favorable prices compared to competitors in the consumer. The task of these products is to retain price-sensitive customers.
• Image Makers. These are expensive, prestigious products or products with a novelty image. Their task is not so much to generate revenue but to attract and create an image of a company that keeps its finger on the pulse.
• Test Products – these are typically novelties whose demand requires study or special products needed to satisfy the demand of specific clients.

Any of the proposed types of assortment analysis is essentially designed to segment the entire assortment portfolio in order to develop and apply different approaches to inventory management and the choice of marketing tools for promotion and pricing.

Marketing research and competitive intelligence are also integral tools of analysis in assortment management. Only a deep understanding of the market and the current position of one's company in this market will help develop an optimal assortment. A well-structured policy for managing the assortment portfolio will become the most important competitive advantage.