The 70/20/10-Rule when optimizing the assortment
A very simple start when doing assortment optimization, is to group the category’s SKUs into ‘Runners, Walkers and Slow Movers’. This can be an internal-, as well as an external exercise. It is a structured approach, as you will spot on see the framework of the dynamics in the category. The ‘Runners’ are the SKUs that account for 70% of the combined sales in value. These SKUs represent 10% of the total portfolio, and about 70% of total volume. In average, these SKUs are 2.5 times larger in value compared to average SKUs. The ‘Walkers’ are average SKUs in the portfolio, and account for respectively 20% of the sales in value, the SKU-count and the volume. Both Runners and Walkers are all safe bets for the retailer. When it comes to ‘Slow-Movers’, we are moving away from FMCG to SMCG (as in Slow Moving Consumer Goods); with a purpose to detect what is not contributing to a robust category.
The ‘Slow-Movers’ account for only 10% of the category value, but represents as much as 70% of all SKUs in the category. Are all these SKUs bad? By no means, but they need to be understood and monitored. However, most of these are reducing the robustness in the category, when it coms to ROI and space utilization.
The New Pareto Mix
The 70/20/10-Rule has proven to be a better tool for grouping the overall assortment compared to the conventional 80/20-rule. The ‘Runners’ need to be put first in traffic and obtain proportionate higher share of space. ‘Sold Out’ (as in Out of Stock) is the biggest enemy of Sold Down (on floor) or Sold In (in shelf). Theoretically if something is not OOS, it can be sold, but dealing with impulse categories, you can not take the chance of hiding, nor reducing the space for products that ignite category growth. We are back to the saying: ‘How can you ever sell if it can’t be seen’.
The 70/20/10-Rule
Based on research conducted in 1987 by Morgan McCall and colleagues at the Center for Creative Leadership, 70-20-10 describes the optimal sources of learning by successful managers. The very same framework can be used when performing objective assortment optimization.
The assortment is not to be based on democratic terms, but rather on cold objectivity and facts. However; sensitivity and holistic smartness are vital parameters for achieving sustainable growth.
When that is said; ‘Parasites’ do not initially have a role in the portfolio, and should hence be removed and delisted, as they reduce the visibility of SKUs that increase the overall purchase intent.
Hybrid version of Pareto’s Long Tail and 70/20/10-Rule
Frequency distributions with long tails have been studied by statisticians since the 1940s, and a few decades later in the retail industry. Benoît Mandelbrot has been named "the father of long tails" for his early work in the field. The long tail was however very much popularized by Chris Anderson in 2004, where he elaborated the concept in his book ‘The Long Tail: Why the Future of Business Is Selling Less of More’. This is simply a paradox of choices, as shoppers hate bad more than they love good. Creating a powerful assortment / portfolio is an act, and needs be an proactive and objective exercise, with the intention of maximizing the purchase intent.
The long tail
The Long Tail gives a simple, but only a 1-Dimensional perspective of the assortment. Yes, it is good, but yet also a dangerous line to follow religiously. The 70/20/10-rule gives a more balanced and holistic view of the category dynamics.
A rule of thumb
With more than two decades of retail collaboration across the world, we discovered the 1%-Rule. The principle (or rule) is as follows: If an SKU contributes less than 1% of the respective sub-category value, it is simply a parasite in the portfolio. In practical terms, it means you should keep all those SKUs accounting for 99% of the total category value. At a macro view, it sounds pretty fair, but over time we have seen that these SKUs represent 55% of all SKUs across categories. The total value these contribute with, amounts to only 7.5%. Normally the retailers agree to the principle, but rejects to removing these SKUs, as they have a much bigger picture to deal with. In lieu of that, many retailers’ work on assortment optimization, is a sum of many other (political) parameters, creating only a sub-optimal solution.
In some parts of the world, a handful retailers have agreed to a ‘brutal 1%-cut’, for then to crate new well balanced planograms. Perhaps no surprise, but the net effect is lifting the sales by far. We will look more into that below, as it needs to be done with care.
The 1%-Rule
Seems like s soft principle, but the reality is harder than you might think. If the store is to be treated as a real estate entity with space utilization as a metric to optimize ROI, many SKUs do not deserve the space allocated. If these SKUs are removed and space is allocated proportionally correctly, the sales normally improve 5.5 times for what has been net removed. Transactional it makes all the sense in the world, but there are sometimes other factors that need to be analyzed before the cut is implemented. More about that later.
On a final note
Some shoppers love a wide assortment, and the wider it is, the better it is. Others, on the other hand, dislike a wide assortment. They are simply on a mission to find their evoked set of products per category as fast as possible. The net effect of the feelings of these two groups, creates the optimal ‘parasite cut-off’. By working with retailers across the world, the 1%-Rule was the optimal place to make the cut.
The paradox of choice…
Some shoppers just love a wide assortment. Other shoppers dislike the complexity of a wide assortment. Too many choices might lead them to feel stress, choice paralysis, and sometimes even regret. ‘People hate bad more than they love good’; hence the purchase intent normally decreases at a given level. The net effect of these positive and negative feelings is normally at 1% of sub-category level.