May 19, 2015

Merchandise Category Interaction

You've enjoyed an annual physical, right?

You learn that your cholesterol is too high (too many nachos), so you are prescribed a drug. Before the drug is prescribed, however, your doctor determines if the drug will interact with other drugs you are taking.

You don't want drugs interacting negatively, do you?

The same issue happens in your business. But we're not trained to measure interactions. The vendor community prescribes solutions. What if their solutions cause negative interactions within your business?

I assure you, the solutions some of those folks prescribe for you yield negative and unfavorable interactions.

The table above is a geeky table of logistic regression coefficients for a business with thirteen merchandise categories (categories 00, 01, 02, 03, 04, 05, 06, 07, 08, 09, 10, 11, 12). The dependent variable is a 1/0 indicator, measuring whether a customer purchased from that category in the past year. The independent variables are demand ($/1000) amounts for each category for the period 13-24 months ago (this is the point in the discussion where some in the vendor community will tell you I'm nuts - remember, they are prescribing drugs, we are diagnosing problems, two very different disciplines).

Read down the "Category 05" column. Here, I am measuring the merchandise categories that positively/negatively interact with future purchasing in Category 05 (yes, these are actual equations from an actual business ... I just omitted what the actual category meanings/definitions are). What do you see?
  • Category 00 interacts positively.
  • Category 03 interacts negatively.
  • Category 04 interacts positively.
  • Category 05 interacts positively (duh).
  • Category 06 interacts positively.
  • Category 07 interacts positively.
  • Category 08 interacts positively.
  • Category 08 interacts positively.
  • Category 10 interacts positively.
  • Category 11 interacts positively.
  • Category 12 interacts positively.
This is one, big, bubbly ecosystem, don't you think? Only two of the thirteen categories (01, 02) don't interact with this category. Ten of the interactions are positive. One interaction (03) is negative.

This category goes as the entire business goes. When a customer purchases from Category 08 today, this category gets benefit tomorrow.

Let's preview something for tomorrow. Read across the row for Category 03. What do you see? Given what I've explained so far, what does this mean to you?