With customer demands coming in hotter and the stakes higher than ever, assortment planning is the key to profit growth. Here, we help you avoid profit margin mayhem with a considered, data-driven assortment plan.
Flying by the seat of your impeccably tailored pants when it comes to your product assortment is never the best use of time. But imagine your store is missing out on 10% of profit simply because you haven't invested in an assortment plan.
An assortment plan provides:
- a solid structure around how many options of styles or colours to buy,
- and at what price,
- gives buyers guidance when buying inventory, and
- gives merchandisers a financial plan and confidence in the sales budgets
What is assortment planning?
Assortment planning, sometimes referred to as option planning, is the process of selecting the number of different styles of products to be ranged, determining how much of each product to buy and the pricing of these products for a specific time period.
It's basically the harmonious union of merchandising, product placement and store layout (online or physical) to get the most bang from the season and provide a competitive advantage.
The assortment plan occurs after the budgets are set and the open to buy (OTB) has been agreed. It can be either be an excel spreadsheet or created in software such as Style Arcade, where essentially the Buyer and the Merchandise Planner (aka Merchandiser) join forces to agree on:
1. How many options (style-colours) to buy in each category to reach the sales budget
2. The pricing hierarchy of each category to optimise profit
3. Depth of buy per option
4. High/mid/low volume tiering options
5. Continuity options (what you might call your "core styles") - options that last all year round, never go on sale and must always be in stock ~ a plain white tee for example.
6. Store grading - retail stores all come in different sizes & locations with varying customer demands: fashionability, location and price for example. This is all managed by the store grading. More on this later.
Why is assortment planning important?
Having an assortment planning strategy is pretty much up there on your most important list because assortment planning allows you to see what's driving cash flow, and how you can keep driving growth and revenue while you manage customer demand.
Through accurate and considered planning, you can:
- Optimise sales by meeting customer demand
- Reduce inventory waste by not over-buying
- Optimise profit through careful profit margin planning
- Increase customer conversions through buying the in-demand options/categories
- Reduce markdown activity through planning width (no. options) and depth (units per option) of range
- Set targets that can be referred to throughout the season to track performance
- Reduces out-of-stock scenarios
Particularly on the last point, if Black Friday Cyber Monday has taught us anything, its the importance of a well-oiled supply chain. And if you were to put a number on the impact this can have, according to the retail analyst IHL retailers around the world generally lose $1 trillion in revenue due to out-of-stock situations.
This brings us to our next point; actually completing and effectively implementing your assortment plan to avoid unnecessary losses.
Completing an assortment plan in 7 steps
Here’s one we prepared earlier 🥧. Download our assortment planning template, and start making it rain by following the 7 easy steps below:
1. Plan your product
Using historical data as a starting point, decide on the number of options and the average depth per option you want to range. Remembering that this needs to match back to your agreed budget.
2. Plan your intake
Decide on the new intake margin you want to target. You always want to aim for an increase from last year through:
- Increasing your buy units
- Negotiating with suppliers
- Looking for new suppliers with better margin
- Negotiating on freight charges
3. Decide on pricing
Plan your new pricing architecture. Things to consider:
- Don't have too many price points! The customer needs to see the value in each
- Think about what you want your entry and exit price points to be
- Run some competitor analysis to sense check you're competitive
4. Check your sales
Input last year's sales data and check your new plan is achieving the budget you set. The purpose of the assortment plan is to match back to your budget (or very close to!)
5. Plan your markdowns
Markdowns are essential to clear through sufficient inventory in-season. Unfortunately not all products will sell at the same rate and the assortment plan needs to account for this. For a fashion retailer, a minimum markdown % should be 18-20% but not higher than 25%.
6. Check your profit
Sense check your profit is matching back to the budget. Your intake margin % and markdown % directly influence this number so you'll have to adjust these 2 figures until you come close to budget.
7. Store grade and tier your products
Assuming you have a retail store network, you'll need to decide on which stores these products are being ranged to. A common 3 tier approach for store grading is as follows:
- Top stores - products that only go to high profile fashion stores, often in large cities with a lot of floor space to showcase inventory.
- Mid stores - products that go further down the retail chain to stores in smaller cities/towns with less fashionability and space to hold inventory
- All Stores - Products that go to all stores - which will mostly be the basics!
After grading your products it’s time to decide on the quantities per store (tiering). It’s best practice to fluctuate your buy quantities per style, depending on the rate of sale at which you think it will sell.
Rate of Sale (ROS) is the average number of sales made in any given period.
Merchandisers use like-styles to gauge what they think a product's ROS will be, and then tier this to either high/mid/low depths across the retail chain. For example, a product's ROS might be 20 units per week, some stores will sell 10 units whilst others will sell 2.
Use historical data and the high/mid/low tiering approach to perfect your allocations. JUST DON’T SEND THE SAME BUY QUANTITIES TO ALL STORES! PLEASE!
Finally, check your assortment plan matches back to your budget for all the key metrics of sales, profit, intake & markdowns.
Tips for assortment planning success
Curating product ranges by category, price, and store is the key to a successful assortment plan.
Often the assortment plan is too heavily influenced by historical data. Yes, this is very much required to carefully plan the following season, but it's important to not disregard the product aesthetic, trends and market influences. Just because a certain colour sold like hot cakes last season, doesn't mean it will the next.
The following tips should not be ignored when building a successful assortment plan:
1. Devil is in the details
Planning at the category, price, colour, and store level means you can closely track performance throughout the season to know which are over or underperforming to plan. Having this information on hand will allow you to pivot in season and re-invest into the categories that are over-performing and reduce risk in those that aren't.
2. Demand guides direction
Look at your past retail analytics to determine your future benchmarks and growth trends. The best way to do this is by completing a post-season analysis.
After completing your post-season analysis you'll know the demand of your products and categories and therefore the direction you want to go in with your assortment plan. You'll have the answers to the following questions:
- Which categories should I grow next season and which should I reduce in investment?
- Which price points perform better than others? Is there a maximum price my customer is willing to spend?
- Are there colours that sell out fast?
3. Perfect those price points
Customers like to know what they're buying is worth the price they have to pay. A common mistake is to blindly set pricing based on hitting a target profit %, but in fact the best way to price products should be based on what you think the product is worth, balanced with what your customer is willing to pay.
As a merchandise planning consultant, I analysed a fashion retailer's pricing hierarchy across multiple categories. There were categories where the customer was willing to pay more so we increased the prices and uncovered $300k worth of profit. One category showed opportunity to increase the $74.95 price point to $79.95. When looking at the actual products in the $74.95 bracket they were very similar to those priced $79.95. We, therefore, had the confidence to say the customer would be willing to pay more.
TIP: When in the higher price points, $5 increments in pricing is not enough for the customer to understand the difference in value
4. Accuracy with allocations
Not all stores sell at the same rate and they all have slightly different customers due to geo-location and customer demographics. For this reason, don't send all stock to all stores! Do some analysis on what sells best where and be strategic on your allocation of stock.
There are so many ways you can benefit from a mix of data-driven and intuitive assortment planning. Hello, retention! Keep those loyal customers coming back, and keep them satisfied with styles you know they love, and new styles you know they’ll want to try on.
Reap the benefits of controlled inventory spending by avoiding misallocation and having to move aged inventory.
Best of all, you can leave the competition in your wake by being the first to offer the most-wanted styles, silhouettes and colours.