Good news for retailers: a new study indicates that you can increase sales without dropping prices too much or too often and cutting into your profit margins. How? By placing items frequently purchased in tandem closer together or inducing the purchase of one item by displaying related items closer.
Retailers have long been aware that the sales of one item can impact sales of another item, but until recently, not much was known about the degree of this relationship. A team of researchers, including Coleman Chair Professor in Marketing Venkatesh Shankar, looked at sales data for chips and cola (two items often consumed together) in a chain of grocery stores. To examine the effect of proximity on sales, they analyzed data on different placements of the items in 180 stores over 2.5 years.
When they moved chips one aisle closer to colas, sales of both items increased an average of 0.7 percent. When they moved the items one aisle further apart, sales decreased an average of 1.4 percent. When the items were arranged facing each other in the same aisle, sales of both increased 9.2 percent.
Simply changing the placement of these items led to a lift in sales that would be equivalent to running a price-cut promotion, without any loss in profit, says Shankar.
The significance of this study is that it can enable retailers to better manage their profits. Retailers frequently manage categories within a store separately, when their sales could be improved by a more holistic approach across categories. Sometimes selling less in one category means selling more in another category, thus increasing net profits. Retailers must consider these cross-category effects to maximize sales, says Shankar.
While the study examined food items, Shankar says the model he and colleagues created to predict how placement will affect sales could be employed in any retail setting, from electronics to clothing.
This research has value for manufacturers as well as retailers, as in the packaged consumer goods market, manufacturers often partner with retailers in promoting their items. By understanding cross-category sales effects, retailers and manufacturers can work together to plan more effective merchandising and promotions. This is especially relevant to manufacturers that own products in multiple categories, such as PepsiCo, which owns Pepsi (beverages) and Frito-Lay (snacks). Integrated marketing of these items leads to higher sales than independent promotion.
The lift in sales of these items from the aisle and display placements of these two items was not equal, though, notes Shankar. Moving the chips and colas closer together did impact sales of eachâ€”but it impacted sales of colas more. Why? Consumer behavior. Shankar theorizes that consumers don’t often eat chips without a drink; however they do drink cola without needing an accompanying snack.
Another finding of the study was that not all brands were impacted equally by the change in aisle placement: when the items were moved closer together, stronger brands (Coke and Pepsi) experienced a greater sales lift than weaker brands (RC Cola and the store brand cola). Shankar expects that the reason for this may be that the second purchase is more of an impulse item. As the decision to buy the second item is made rapidly, shoppers tend to buy the more well known brand.
This information can be useful to consumers as well as retailers, says Shankar. Smart shoppers need to know what tactics are being employed by retailers to entice them to buy more than they had planned so that they can avoid overspending.
For more information
For further information, contact Shankar at email@example.com.
The article, “Cross-category effects of aisle and display placements: a spatial modeling approach and insights,” appeared in Journal of Marketing in May 2009.
Categories: Research Notes