Leveraging Customer Insights to Avoid Product Cannibalization

Leveraging Customer Insights to Avoid Product Cannibalization

Leveraging Customer Insights to Avoid Product Cannibalization
March 31, 2020 Aditya Rastogi - Director of Global Science Services, Revionics

I have signed up for the Austin Capital 10K run and need to start training for the 6.2-mile run. However, my running shoes are worn out and I need to get a new pair and break them in before the race. I would start this decision process by looking at options online or visiting a sporting goods store. I explore the various brands and styles and compare prices, looking for those within my price range.

I would continue to narrow my search based on styles and colors that works for me.  Given this narrower choice group, the decision on selecting “the” shoe will be heavily influenced by what triggers the retailers provide. What is the difference in price across the different styles and brands that I like? Is there a promotion on my preferred shoe brands and styles?

If there is a discount on the brand I prefer, I would be inclined to purchase that brand, even though I was willing to pay a premium for it. On the other hand, if a premium style is discounted, I would feel like I am getting more value for my money and I may be willing to spend more to get the higher value from the premium style.

Trade Up | RevionicsCannibalization, also known as demand substitution, is real and it is played out in retail on a daily basis.  However, not all cannibalization is bad.  Retailers need to understand the variations in shopper behaviors across their product assortment and then promote the right product at the right discount, which provides Trade-Up incentive to the shoppers, i.e., a better value story so the shopper spends more. If the selling price for category or brand does not decrease as much as the promotional discount, the shopper is trading up and spending more per unit during the promotional period.  This is the behavior that the retailer should try to drive. If the category or brand selling price decreases about the same as the promotional discount, the consumer is incented to take the promotional discount for items for which they were willing to pay a higher price.  The retailer should try to stop this shopping behavior, as this causes demand to be transferred to the promoted items resulting in shoppers taking the discount on the promoted item, when they were willing to pay a higher price for non-promoted items.

Understanding the shopper decision matrix is not straight forward. It requires deep understanding of the shopper needs, and the relationships between different brands, styles and products. Revionics has built a robust machine learning algorithms that can surface shopper decision matrix, at scale, across all product categories.  These insights empower merchants to drive the shopping behaviors that promote Trade-Ups.

Revionics | ProductsRevionics uses its machine learning algorithms to determine the demand substitution index within each category. This index provides insights into which category has a higher propensity of demand substitution and how much of the incremental demand cannibalize sales from other products. This chart shows that Baby wipes have higher substitution than Baby foods.  Shoppers do not substitute the purchase of “other” types of baby food even if they are on sale. However, if the wipes are on sale, they would purchase the discounted wipes.  Another interesting observation is that Organic Baby food has higher cannibalization than other Baby food. People who buy organic baby food are ok with switching brands as long as the discounted item is also an organic product.Revionics | Product Cannibilization

Factors that drive substitution

  • Features and functionality of the product: Products with a lot of product features than to have lower substitution.
  • Brand Loyalty and brand preference: For stronger brands, consumers are willing to pay a premium, however, it varies significantly by category
  • Price point: higher price point items tend to have lower substitution compared to lower price items
  • Consumption patterns: we observed that cat food had lower substitution than dog food

Retailers do have some control in determining the substitution behavior within their products by controlling their assortment. With the use of AI and ML techniques, Revionics enables retailers to drive shopper behavior which is a win-win for the shopper and the retailer. Without these insights, retailers end up promoting the wrong items which results in margin leakage for the retailer.

 

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