LeadingPracticesin

MarketBasketAnalysis
HowTopRetailersareUsingMarketBasketAnalysis
toWinMarginandMarketShare

LarryGordon,Partner
TheFactPointGroup
349FirstStreet
LosAltos,CA94022
(650)5592105
gordon@factpoint.com

2008FactPointGroup

ExecutiveSummary
Increasingly,retailingisbecomingahighperformancesport,andlike
athletes,retailersareseekingacompetitiveedgethroughtechnology.Market
basketanalysis,alsoknownasaffinityanalysis,hasemergedasthenextstepinthe
evolutionofretailmerchandisingandpromotion.Marketbasketanalysisallows
leadingretailerstoquicklyandeasilylookatthesize,contents,andvalueoftheir
customersmarketbaskettounderstandthepatternsinhowproductsare
purchasedtogether,orbasicproductaffinities.Advancedimplementationsof
marketbasketanalysisleveragenearinstantresultstoencouragetrainofthought
orinteractiveanalysis,enablingretailerstodrilldownintocustomerbuying
patternsovertimetoprecisely
targetandunderstandspecific
Leadingretailersareleveraging
combinationsofproducts,
departments,brands,categories,
MarketBasketAnalysisto:
andeventimeofday.
Developmoreprofitableadvertisingand

promotions
Targetoffersmoreprecisely
Improveloyaltycardpromotionswith
longitudinalanalysis
Attractmoretrafficintostores
Increasethesizeandvalueofthebasketof
purchases
Testandlearnbyusingthemarketplaceasa
laboratory
Empowerplannersandmerchantstomake
smarterdecisions
Determinethemagicpricepointforindividual
stores
Matchinventorytoneedsbycustomizinglayouts,
assortments,andpricingtothelocaldemographic

Tounderstandhowtopretailers
leveragemarketbasketanalysisin
theirbusinessdecisions,The
FactPointGroupinterviewedover
50retailerswithrevenuesfrom
$400millionto$24billion.What
wefoundwasthatan
overwhelmingmajorityofretailers
werefamiliarwithmarketbasket
analysisandlookingtoexpandtheir
capabilitiesinthatarea.This
researchstudyreportsonthebest
practicesinmarketbasketanalysis.

Withmarketbasketanalysis,
leadingretailerscandrivemore
profitableadvertisingandpromotions,attractmorecustomers,increasethevalueof
themarketbasket,andmuchmore.Buyers,planners,merchandisers,andstore
managers,arebeginningtounderstandhowthisnewgenerationofeasytouse
marketbasketanalysistoolshelpsthemworksmarterandcompetemore
successfully.

ForRetailers,EveryWeekistheOlympics
Asthecompetitionfortheconsumersshrinkingwalletintensifies,retailingis
becominglikeahighperformancesportwherewinningcandependon
fractionsofasecond.Forretailers,winningmeansoutsellingandoutprofiting
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thecompetition.A1%liftinsales,or1/10th%improvementinmargin,cantipthe
balancebetweensuccess,survival,orfailure.Butbelowaretailerstoplinesales,
successrequiresconstantfinetuningofthecontrolsavailabletotheretail
disciplines,suchasmerchandiseplanning,buying,advertising,promotions,
assortments,siteselection,etc.
Retailersassumeriskeverytimetheymakedecisionsaround
buying/replenishment,advertising/promotions,andassortmentplanning.
Surprisingly,thesehighdollarvaluedecisionsarestillfrequentlybasedongutfeel
orinstincts.Buttheretailenvironmentischangingascompetitionsqueezes
margins.Buying
mistakeshavelongbeen
WhoCanBenefitfromMarketBasketAnalysis?
afactoflifeforretailers.
Oneleadingretailer
Roles
IntervieweeTitles
confessed,WhatwasOK
Management
VPMerchandisePlanningand
beforeisntanymore.Its
Strategy
easytospendlotsof
VPMarketingStrategyandFinance
moneyandmakelotsof
SVPPlanning,Allocation,andIT
mistakesitusedtobeyou
Merchandising
DirectorofBusinessAnalysisfor
bought5000SKUsand
Merchandising
2000wereright.Today,
DirectorDatabaseandLoyalty
wehavetopickright
Marketing
buy3000and2000are
SeniorManager,ShopperInsights
right.
ManagerMerchandisePlanning
Toomuchornot
Store
DirectorStoreOperations
enough.Theageold
Operations
VPMerchandisingSystems
retailproblemisstocking
Advertising
VP,SalesandPromotions
toomuchofthewrong
andPromotion
VP,BrandPromotion
merchandiseandnot
Director,PromotionalAdvertising
enoughoftheright.The
Director,BrandAdvertising
rightmerchandisemoves
andthewrongstuffsits
untilitismarkeddown.Thebuyerslifeisfurthercomplicatedwhenheorshe
cannotobtainsufficientquantitiesofpopularproducts,orwhenpressuredby
supplierstobuyuncomfortablylargequantitiesoflesspopularproducts.These
competitiveandfinancialpressuresmotivateretailerstoseekbettertoolsthatwill
improvetheirabilitytomanagethroughthesesituations.
Likestarathletes,leadingretailerslooktotechnologytogainacompetitive
edge.Mostretailersadmitthattheytraditionallyhavebeenproductfocusedand
knowsurprisinglylittleabouttheircustomers.Theirdesireformoreinsightinto
customerbuyingbehaviorhasdrivenmanytoinvestinbusinessanalyticssolutions
fromvendorslikeOracle,MicroStrategy,SAS,Cognos,BusinessObjects,andothers.
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Inthe1990s,retailerswereearlyimplementersofPOSsystemsanddata
warehousesforcapturingandstoringhugevolumesoftransactiondata.Butthey
soonrealizedthatthistransactiondataonlyhasvalueifitcanbequickly
interpreted,analyzed,andtranslatedintoaction.Retailerscravemoreknowledge
aboutcustomerbuyingbehaviorandarefrustratedthatthetremendousvalue
trappedinsidethesePOSanddatawarehousesystemsisextremelydifficultto
access,requireslengthyleadtimes,andfrequentlyinvolvestheskillsofastatistician
ordedicateddataanalyst.
Themainissueisthatanalyticsolutionslackthespeedandfocusthattodays
retailersneedtogainanedge.Whilepowerful,theseanalyticssystemsfocuson
transactions,notthecustomerortheirpurchasingpatterns.Existingtoolscannot
easilyidentifytrendsandanomaliesincustomerbuyingbehavior.Inaddition,these
toolsremainexpensive,timeconsumingtodeploy,andstillrequiresignificantIT
andapplicationexpertise,whichwefoundtobemostlycentralized,thin,orlacking.
Thereportsgeneratedbyexistingtoolsareprimarilyperformancesummaries,great
forunderstandingoverallsalesorsamestoreperformance,buttheydonthelp
retailersfinessetheirassortmentsandpromotionstoattractandretaincustomers.
Theinsufficiencyofcurrentanalyticstoolsiswhysomanyretailmerchants
continuetorelyonExcelspreadsheetstoaccomplishtheirjobs.

MarketBasketAnalysistotheRescue...
Marketbasketanalysis(MBA)addressesmanyofthekeychallengesthat
retailersfacetodaybyansweringanumberofvexingquestions.Leading
retailersarelearningtouseMBAtomaketheirbusinessesmorepredictableand
profitablebyidentifyingproductaffinitiesandattachmentrates,eventhosethat
happenovertime.Thesepatternsinthetransactionrecordsrevealhowcustomers
buy,whichisextremelyvariableacrosstheretailspectrum,evenonasmallmarket
basketsize(apharmacywith35items),oralargerbasketsize(atypicalgrocery
storewith1520items).
Inourresearch,wecharacterizedtwolevelsofmarketbasketcapabilitiesusedby
retailers:
BasicMBAallowsretailerstolookatthesizeandcontentsofamarketbasketand
seebasicproductaffinities,butdoesnotallowfortrainofthoughtorinteractive
explorationofthedata.
Advanced(orzoomable)MBAoffersmoreadvancedcapabilitiestointeractwith
thetransactiondatatodiscoverpatterns,affinitiesandassociations.Interactive
trainofthoughtanalysisisvaluablebecauseithelpsretailerstoworkharder,
smarter,andinrealtime.Asyoulookatthedatayougeneratemoreanalysisaround
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anomalies(unexpectedpatterns).Retailerswanttobeabletozoomintotarget
preciselyspecificcombinationsofdepartments,stores,timeperiods,campaigns,or
promotions,andthendrilldownbybrand,category,timeofday,ortimeperiod.
Retailersalsowanttobeabletoviewacustomersmarketbasketovertime,taking
intoaccountmultiplestorevisitsorfollowonpurchases.Accordingtoone
interviewee,Thereisnosuchthingasanaveragemarketbasket.MBAwithout
drilldownhaslittlevaluebecauseretailersdontwanttooptimizearoundanaverage
situationthat,inreality,doesnthappen.

LeadingPracticesinMarketBasketAnalysis
InourinterviewswelearnedhowretailersareusingMBAtoexploretransaction
datatodeterminetheaffinitiesofwhatpeoplebuytodetectchangesinbasket
composition,sizeandvalue,andtodiscovernewinsightsintotheircustomers
buyingbehavior.

Moreprofitableadvertisingandpromotions.RetailersareusingMBAto
makeadvertisingandpromotionsmorepredictablebyunderstandinghow
buyersrespondtodifferentoffersandcommunicationsvehicles.For
example,MBAcanhelpretailersavoidunnecessarydiscountsby
understandingwhenandwherediscountswillmakeadifferencetotopline
sales,knowingthatareductioninunnecessarymarkdownswillimprove
grossmargins.Retailersalsowanttoseparatesalestrendsfromthe
advertisingeffecttounderstand,Isourpromotionjustshiftingrevenue
aroundorreallyupliftinggrosssales?Howdidsaleschangeandisthis
meaningfulornot.WhatelsewassoldwithwhatIadvertised?WhatdidI
cannibalize?Furthermore,retailerswanttounderstandwhatfollowon
purchasesapromotionmightdrive,suchasanHDTVpromotionthatdrives
thepurchaseofhighmarginDVRsandBlurayplayersoverthenextfew
months.

MoreprecisetargetingofoffersimprovesROI.MBAisusedtooptimize
campaignsandpromotionsformarginsandsalesupliftwithmoreprecise
targeting.Forexample,increasedprecisionintargetingoffersresultsin
higherredemptionratesandallowsretailerstowinincrementalspendby
promotingtherightproductmixtotherightcustomerattherighttime.One
retailerwantedtoknow,Canweget90%ofthebenefitbymoreprecisely
sending5millionvs.10millionmailersandvarytheofferacrossthose
mailers?Anotherstatedthat,Aquarterpointimprovementinredemptionis
thedifferencebetweensolidROIandafailedcampaign.

Betterloyaltycardpromotionswithlongitudinalanalysis.Longitudinal
useofMBAallowsretailerstocharacterizethebuyingbehaviorofcustomers
overtime,leveragingthatknowledgeforbetterunderstandingoftheir
customerbases.Retailersuseloyaltycardstocapturecustomerlifecycle
datasothattheycananalyzeacustomerslifetimepurchasingbehavior,
suchasshoppingfrequencyorshiftsincategories.Forexample,onetoy
retailerexplainedthatitdoesntmakesenseforittosellvideogame
machines(withverylittlemargins)unlessthecustomeralsobuysthe

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accessoriesandgamesoftware(withhighmargins).TheyuseMBAagainst
theirloyaltycarddatatodeterminetheoverallmarginsontheirvideo
gamingsalesandtocreatecustomerretentionpromotionstoinfluence
buyerstopurchasefollowongamesandaccessoriesfromthemandnot
fromanotherretailer.

Attractmoretrafficintostore.Retailerscanbetterunderstandwhich
productsandofferswillgetcustomersintothestorebycorrelatingMBA
withfoottrafficcounts,thenattachmentrates,tounderstandwhatthey
purchasedonceyougottheminthestore.Thethingsyouaregivingaway
getthemin,butwhatdotheybuywhentheycomein?Whatisthe
attachmenttothelossleader?Oncetheretailerknowswhatbroughta
customerintothestore,theycanuseMBAtounderstandhowtokeepthat
customercomingback.

Increasethesizeandvalueofthemarketbasket.Withloyaltycarddata,
retailerscanseehowmanytimesthecustomerwasinthestoreandthe
contentsoftheirbasket,thenleveragingthatknowledgewiththegoalof
increasingthesizeoftheirbasket.WithMBA,theycanidentifyandtarget
promotionstocustomerswhoforexamplebuyalltheirgroceryneeds
exceptpetfood,orwhousedtobuypaperproductsbutstopped.

Testandlearnbyusingthemarketplaceasalaboratory.Someretailers
describedhowtheyuseMBAtodeterminethevalueofanincremental
marketingeventataselectcontrolgroupofstores,andthenrunthe
analysisatanothertestgroupofstores.Forexample,retailersdescribed
usingMBAtodeterminehowtheycanincreasetheaverageticketvalue
withouthavingtospendmoreorsacrificemargin.Theydothisby
separatingthebasesalestrendfromtheadvertisingeffectforthesame
timeframe.

Determinethemagicpricepointforthisstore.Today,usingtraditional
businessintelligencetoolstooptimizepricingcantaketwoorthreeweeks.
RetailerswanttobeabletouseondemandMBAtomakethesedecisionsin
nearrealtimetoanswerquestionslike,Whatitemsdidweraisethepriceof
thatconsumersstoppedbuying?Anotherretailerdescribed,WeuseMBAto
maintainpricingzoneswherewepriceoneareadifferentfromanother,e.g.if
oneofourstoresisnexttoaWalMart.

Matchinventorytoneedbycustomizingstoreandassortmenttotrade
areademographics.MBAallowschainstorestoenhancetheircore
assortmentbymicroassortingproductstotailortheassortmenttothe
tradeareademographics.Assortmentcanvarybyclimate,fashion,or
demographicssuchasincome,age,orurbanvs.rural.Wehave12
pharmaciesnearWallStreetthataremuchdifferentthanoursuburbanstores.
Whatisthebestassortmentandpricing?Doweputinaselfservecoffeebar
inthosestores?Whatopportunitiesdowehave?

Optimizedstorelayout.RetailersarealsousingMBAtoimprovespace
planningandvisualmerchandisingforimprovedcrosssellingandupsell.
Forexample,areendcapsreallydrivingmoresales,and,iftheyare,arethey
alsodrivingsalesofcomplementaryproducts?

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HowMarketBasketAnalysisEmpowersMerchandisers
Merchandisersneedtoseetrendslongertermtodecidehowmuchtobuyandhow
theassortmentfitsintothebusinessmodel.Herearesomewaysthatleading
retailersareempoweringtheirmerchandiserswithMBA.

Empowertheretailplanners.Retailersneedbettertoolstohelpthe
plannersandthemerchants.Planningisoneofthefastergrowingpartsof
theretailbusiness.Theintuitionofthecrustyoldschoolbuyerisamyth
becausethereisalackofinformation.Thatswhyplanningcametobe;there
didntusedtobeplanners.Agoodplannerasks,Howmuchshouldwebuy,
howarewegoingtodisplay,andwhatisthelifecycleofthisproduct(onetime
shotorcarryitforthreeyears)?Ittakesapartnershipbetweentheretail
plannersandthemerchantstodetermine:Canwesellfastenoughtocover
carryingcostsandwilltheinitialmarkupprovidesufficientmarginsto
promotetosellthrough?Thesehighvalue,highriskdecisionscanbe
significantlyimprovedwiththecustomerinsightsprovidedbyMBA.

Empowerthemerchant(buyer)tobuysmarter.Buyingmistakesare
the#1retailpainaccordingtoourinterviews.MBAempowersmerchantsto
buysmarterandstrengthentheirnegotiatingpositionwithvendorsby
providingthemerchantswithbetterinformationaboutcustomerbuying
behavior.WhilesomeretailersprefertorestricttheuseofMBAtothe
planners,retailersareincreasinglyexperimentingwithprovidingmerchants
withstructuredbuteasytouseMBAtools.Merchantsfocusprimarilyon
buyinginventory,assortmentplanning,andreplenishment,butcanalsobe
involvedwithadvertising,promotions,andmarkdowns.MBAcanhelp
improvereplenishmentdecisionsandprovideimprovedunderstandingof
seasonaldemand.

Conclusion
ProgressiveretailersseeMBAasastrategictoolthatwillhelpthemincreasetheir
successandprovidethemwiththeedgethattheyneed.Byusingmarketbasket
analysis,leadingretailersareincreasingtheircompetitivenessbyfocusingdirectly
onthecustomersbuyinghabits,andthenusingthatknowledgetoquicklytailor
theiroperationstothechangingneedsoftheircustomersandtradeareas.
Additionally,leadingretailersarebeginningtoequipbuyers,merchandisers,
planners,andstoremanagerswithpowerfulandconvenientmarketbasketanalysis
tools,improvingsuccessacrosstheboard.
OndemandMBAishugelyvaluablebecauseitwouldallowustoworkharderand
smarter.IwouldhavemoretodothanIcanhandlebecauseIcangetitdonefast.
Onceyouuncorkthegenie,everyonewillgowild.
DirectorofConsumerInsightsataleadingshoestorechain

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ResearchMethodology
Tolearnhowtheleadingretailersareusingmarketbasketanalysis(MBA),The
FactPointGrouprecentlyinterviewedover50topretailerswithrevenuesranging
from$400millionto$24billion.Intheseinterviews,theretailersdiscussedhow
theycurrentlyuseMBAaswellashowtheyseetheiruseofMBAgrowinginthe
future.Theinterviewswereconductedwithretailvicepresidents,directors,and
managersacrossmerchandising,marketing,storeoperationsandIT.Thetypesof
companiesinterviewedincludedabroadselectionofretailers,fromhardware
storestoclothingretailerstoconveniencestores.

AbouttheSponsor:Quantivo
Quantivoispioneeringafundamentallynewapproachtocustomerbehavior
analytics.Thecompany'sondemandserviceandpatentedtechnologiesempower
businessmanagerswithdeepandtimelyunderstandingsofcustomerbehaviorata
fractionofthecomplexity,time,andcostsrequiredbytoday'ssolutions.With
Quantivo,consumercentricenterprisesmakeimpactfulbusinessanalyticsofrich,
highlydetaileddatadirectlyaccessibletoawidesetofbusinessanalystsand
decisionmakersforapplicationssuchasmarketingoptimization,purchaseanalysis,
policyverification,frauddetection,andmore.Formoreinformation,pleasevisit
www.quantivo.com,emailinfo@quantivo.com,orcall(650)4034430.

AboutTheFactPointGroup
TheFactPointGroup(www.factpoint.com)isaSiliconValleybasedmarket
research,publishingandconsultingfirmspecializingintheearlyadoptionofnew
technologies.TheFactPointGrouphasbeenproducingworldclassresearch,
analysis,andconsultingsince1993andcontinuestohelpitsclientssellandusenew
technologysolutions.TolearnmoreaboutFactPointandthisresearchcontact
LarryGordonatgordon@factpoint.comor(650)5592105.

2008FactPointGroup

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