E-Tail Genius was selected to work with an international wholesaler of technical products. The wholesalers sells an extensive assortment of installation materials.
The online assortment is an essential part of the success. It’s a important driver to stand out from the competition and it has a strong influence on the revenue. The current of 2.5 million is quite extensive and the company want to optimize their assortment.
Assortment optimization refers to the problem of selecting a set of products to offer to a group of customers so as to maximize the revenue that is realized when customers make purchases according to their preferences. Motivated by the availability of real-time data on customer characteristics, we consider the problem of personalizing the assortment of products for each arriving customer.
The goal was to develop a revenue-maximizing policy that determines the assortment to offer to each arriving customer, taking into account the customer type and the current inventories.
We first observed that differentiating among customer types (even just their locations) can significantly increase revenues. We observe that customizing the assortment of product for each customer’s location leads to an increase in revenues of 10%. Secondly, we developed an algorithm which takes into account both the revenue that would be obtained from the customer and the current inventory levels to decide which assortments to offer.
The main idea behind the algorithm is simple. Sometimes it might be better to sell a product with a lower marginal revenue but a high inventory level than to sell a product with high marginal revenue but a small remaining inventory. This is because future customers might only be interested in products with low (or no) inventory, and if we have already sold those products, we would lose these profitable opportunities.
When using the assortment optimization tool:
- marketeers are able to make personalized assortiments to increase the online revenues;
- the operations department is able to align online sales with product inventories;
- marketeers get insights wat drivers customer demand and how this demand can be influences;
Genius’ ability to explain its own actions is particularly important to the assortiment optimization project, because all the different stakeholders should understand why it’s a good decision to offer offer different products per customer group.
This new tool is expected to increase the online revenues with 10%.
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