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Market basket analysis
Significant increases in cross-sell revenues can be achieved by using knowledge of customer purchasing habits such as:
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Which combinations are products bought in?
- When they are
purchased?
- What sequence they
are purchased in?
- Is there a variation
dependent on customer profile?
Developing this understanding enables businesses to promote their most profitable products and encourage customers to buy items that might have otherwise been overlooked or missed.
Obvious examples of this are large retailers who store huge volumes of consumer sales, each basket being tracked by individual loyalty
cards or store credit cards.
Similarly, when you place an order on Amazon, a list of potentially interesting products (based on a profile of what other "similar" customers have ordered) is presented. They too are seeking ways to encourage the purchase of additional relevant items and thereby increase average basket value.
Beer and nappies - Know the story?
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The often cited (and some say apocryphal) example of what can be achieved is the case of Wal-Mart, a huge US retail chain (owners of Asda in the UK) - an observant store manager discovered a strong association for many customers between a brand of
disposable nappies (diapers) and sales of beer.
Analysis of purchases revealed that they were made by men, on Friday evenings mainly between 6pm and 7pm. After some serious thinking, the supermarket figured out the rationale was that
mothers, realising they did not have enough stock for baby over the
weekend, asked their husbands to pick some up on the way home from the
office. The husband, wanting to make the diversion to the supermarket of
value to him decides to get some beer in for the weekend.
What did the supermarket do as a consequence?
They put the premium priced beer display next to the diapers. The result was that the fathers
buying diapers and who also usually bought beer now bought the premium beer (the up-sell), as it
was so conveniently located (they would have to go off into another part
of the store to find the regular beer).
Significantly, the men that did not buy beer before began to purchase it when it was so visible and handy - just next to the nappies (the cross-sell). Beer sales skyrocketed.
How to quantify the value of market basket analysis
This type of analysis is certainly not the exclusive domain of the supermarkets. If a company can identify a customer as having purchased a product then market basket analysis can deliver cross-sale opportunities.
Identifying high volume combinations of products
For each customer, you need to compare all items in a basket with all other items in the same basket and then count the number of times each combination exists for the period under consideration e.g. 18 months.
Exclude:
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Multiple purchase of the same product
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Non-products e.g. postage, delivery charges, VAT, etc
Establishing the potential
The results from above can then be sorted to reveal the highest number of purchases or a specific combination.
Now identify for each high volume combination the number of customers that bought only one of the products.
Compare these two result sets to establish where there is a strong propensity to purchase a specific product combination and there is a demonstrable market for its promotion to other customers i.e. customers who purchased one product but not the other (see diagram above).
Using the results
The above provides details of the techniques involved, but you should also take into consideration:
We have helped a number of companies increase their cross-sell potential by using market basket analysis, it is a powerful technique and can generate significant increases in sales.
If you would like to understand more about how market basket analysis could be applied to your business, then
arrange for a free
consultation. |
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Read Michael Collins's article:
Direction
for profitability from understanding your data
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