Implementing the 5 Key Components of Merchandise Planning

by Bizom

July 11 | 04 min read


Retail businesses spend significant time and effort devising a cohesive sales strategy, including analyzing past performance, projecting the future, and identifying inventory needs to ensure the precise coordination of the supply chain, in the hopes of presenting an outcome that appears to be a flawlessly planned operation.

However, the reality of the situation is starkly different when multiple customers complain about the item they require being unavailable or out of stock.

So, how can retail companies ensure efficient inventory management including the timely availability of products regardless of seasonal or trend influences?

The answer is, merchandise planning, and here’s what you need to know about how and why your retail business can benefit from creating and executing a robust merchandising plan.

What is Merchandise Planning?

Retail merchandise planning is a balancing act between selecting, managing, purchasing, displaying, and pricing merchandise in an efficient way, to ensure that retail companies have the appropriate products available at the right time. This strategy maximizes the potential for a high return on investment (ROI), while minimizing excess inventory and enhancing goodwill and reputation with customers who can rely on finding what they want when they need it.

How does AI and technology impact Merchandise Planning?

Using technology and AI are significantly popular and effective ways to streamline and catapult the merchandise planning process. Retailers can use data analytics tools to gain insights into consumer behavior and preferences. These tools analyze large amounts of data from various sources, including sales data, customer feedback, and social media, to identify trends and patterns. Understanding consumer preferences and anticipating trends leads to more effective merchandise plans.

Inventory management systems that use machine learning algorithms analyze sales data, historical trends, and other factors to predict demand and determine optimal inventory levels. This optimization prevents stockouts and reduces the costs associated with overstocking.

The 5 basic components of Merchandise Planning

Effective inventory management is critical for retailers as purchasing and marketing merchandise is one of their most significant expenses. Retail merchandise planning comprises several basic components:

1. Product

When developing a merchandise plan, the most important component is the product itself. Ensuring that you have an adequate supply to meet customer demand is critical. The trick here is to have an ideal mix of different types of products to meet customer demand..

For instance, staple items that remain in demand year-round should always be in stock, while seasonal products require pre-season inventory planning and appropriate management throughout the season to avoid stockouts and excess inventory. Additionally, fad items that are popular for a short time must be approached cautiously from a buying perspective.

Use case: If a grocery store is planning its summer inventory, it must balance staple or everyday items such as bread, milk, and eggs, with seasonal products such as fresh produce and outdoor grilling items. Additionally, the store may choose to carry fad items that are popular during the summer months, such as trendy flavors of ice cream or specialty beverages. By striking the right balance between these different product types, the store can meet customer demand while maximizing profits.

2. Range

The merchandise plan also includes the range of products a retail company sells. It is crucial to invest in a variety of products to provide customers with sufficient options.

For instance, a popular retail chain like Target would have a broad but shallow merchandise mix, providing a wide range of products across various categories. For example, in the clothing section, Target would carry a variety of clothing items for men, women, and children, but may not have the same depth of options as a specialized clothing store. Target would also offer a variety of home goods and electronics, but may not have niche or specialized brands found in specialty stores. Despite not having the same depth of products as a specialized store, Target provides the convenience of finding most of the items needed in one place.

3. Price

Effective pricing is a key element of merchandise planning, but it requires careful consideration and planning. By creating different price ranges, businesses can appeal to a wider range of customers and address different pricing factors such as sales, profitability, and inventory management.

For example, a luxury brand such as Gucci uses premium pricing strategies to target high-end consumers who are willing to pay a premium for quality and exclusivity. This brand creates an aura of luxury and prestige around their products by setting prices that are significantly higher than its competitors.

On the other hand, a mid-range brand like H&M uses a value-based pricing strategy to appeal to budget-conscious shoppers. This brand offers trendy and fashionable clothing at affordable prices to attract a larger customer base.

4. Assortment

Product presentation and assortment are key factors in merchandise planning. The way you combine and present your products is essential to create a positive shopping experience. It is crucial to ensure that products from the same category are grouped together while avoiding mixing unrelated items.

By making it easier for customers to find and select the products they need, you increase the likelihood of making a sale. A great example of a store that presents its assortment well is Urban Outfitters. They organize their products in a way that reflects their brand’s aesthetic, with similar items grouped together by style and color. They also make sure to feature complementary items nearby, like jewelry and shoes, to encourage add-on purchases. By considering both functionality and aesthetics in its merchandising plan, Urban Outfitters creates a shopping experience that resonates with their target audience.

5. Space

To maximize product visibility and accessibility, brick-and-mortar stores should use a variety of fixtures, mannequins, and window displays. One effective technique is to place key items at eye level to attract customers’ attention.

For example, if you operate a pet store, placing popular pet products or treats at eye level can increase sales. Additionally, effective use of space and displays can have a significant impact on sales, as it creates a visually appealing and organized shopping experience for customers.

4 Key Steps to Effective Retail Merchandise Planning

Although the details of merchandise planning can differ depending on the industry and specialty, there are fundamental steps that apply to businesses of all sizes and niches.

  1. Conducting a post-season analysis: To plan for the next sales season, analyze data from the previous season by comparing basic metrics like total sales and specific results like revenue of a particular item or category. Gain context by comparing the numbers to planned numbers from the same year, taking into account factors like marketing and the economy.
  2. Predicting future sales: Use post-season analysis to forecast demand by department, product category, and new/eliminated products. Consider sales potential, market demand, and marketing channels/strategies when reviewing merchandise. Use past and present data to make a final prediction for each product and determine if it’s worth ordering and how much to purchase.
  3. Arranging and assorting: Categorize the products by arranging them into sections based on their type, such as food, wearables, and cosmetics. Group related items together and ensure that there is an appropriate variety and quantity of each category.
  4. Merchandise reporting: To maintain a balance between merchandise and sales, create daily or weekly sales reports for each item to avoid overbuying or reaching dangerously low stock levels. This helps prevent clearance sales, discounts, or offers that can hurt your bottom line.

Merchandise Planning in a nutshell

The process of merchandise planning demands both creativity and data analysis, incorporating the understanding of consumer preferences and the utilization of analytical skills. It plays a vital role in driving sales, optimizing inventory, and enhancing the customer experience.

The benefits of merchandise planning include:

  • Reduced markdowns
  • Increased revenue from available products
  • Higher inventory turnover
  • Decreased carrying costs
  • Fewer out-of-stock situations
  • Satisfied customers
  • Strategic ordering of high-revenue products to maximize ROI

Retailers can leverage technology and artificial intelligence to

  • Make data-driven decisions
  • Predict demand
  • Improve product selection
  • Optimize inventory
  • Develop effective pricing strategies that increase sales and profitability

Implementing the five basic components of merchandise planning can give retail companies an edge in a fiercely competitive market. These components include sales forecasting, inventory planning, assortment planning, pricing strategy, and promotion planning. By effectively executing these components and monitoring retail execution, retail businesses can optimize their operations, better anticipate consumer demand, and stay ahead of their competition. With a well-thought-out merchandise plan, retail manufacturers can ensure that they have the right products, at the right time, and at the right price, leading to increased customer satisfaction and loyalty.

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