October 17, 2013

Three Item Segments - Merchandise Forensics

In a typical Merchandise Forensics project, I create five "grades" for various items. These grades help us understand how the business evolves and changes over time.

First, I pull all transactions for the past year.

Second, I run frequency distributions. There are three key metrics I look for:
  • Top 5% of Annual Demand.
  • Top 5% of Annual Items.
  • Top 45% of Annual Demand.
With these three attributes, I create five item segments.
  • "A" = Item is in top 5% of annual demand and top 5% of annual items.
  • "B" = Item is in top 5% of annual demand, is not in top 5% of annual items.
  • "C" = Item is not in top 5% of annual demand, is in top 5% of annual items.
  • "D" = Item does not qualify for A/B/C, but is in top 45% for annual demand.
In this framework, A/B/C items account for between 50% and 60% of demand, but account for just 6% to 9% of all items. This small number of items dictate the success of your business. If you don't develop new A/B/C items today, you don't have existing A/B/C items tomorrow.

The biggest predictor of business success, in my projects, is the ability of a business to continually infuse the brand with a steady diet of new A/B/C items.

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