In a previous post we shared some of our findings about the relationship between basket diversity and customer value. At the time, we shared some tactics you can use to increase the number of categories a shopper buys with you. In this post we want to take it one step further. We believe retailers should move beyond isolated tactics and put basket diversity analysis at the heart of their customer strategy.
There are two main reasons for this. First, basket diversity is the best predictor of customer value. Our customer analytics show a clear correlation between the number of categories shopped and a customer’s visit frequency. Visit frequency, in turn, is the key driver of a customer’s value. As the chart below shows, on average shoppers will spend about the same amount no matter how often they are in the store. Get them to visit more frequently, and you will grow your revenue.
The second reason is that the basket diversity segmentation is highly actionable. If you segment customers by total value, as many retailers do, you are left without clear next steps. In fact, the next action for each segment ends up being the same: get them to spend more. This is hardly helpful. As we will see, a segmentation based on basket diversity gives a much clearer path of what to do next.
1. How many categories do they buy?
The first element of the customer segmentation is to determine how many categories each customer shops with you. This is relatively straightforward. You may want to have a minimum cut-off to exclude categories with only one or two purchases. For example, grandparents might have been babysitting for the weekend and bought diapers, but it doesn’t make sense to count “Baby” as a category they regularly purchase.
You may then group customers according to whether their basket diversity is High, Medium, or Low. The exact number of categories that constitutes high will vary by vertical (Grocery tends to have more categories than Beauty, for example) and also by the exact structure of your product catalog.
2. What is your wallet share in those categories?
The second element of the segmentation is more challenging, but important. We do not just need to know how many categories a customer buys – we also need to understand the opportunity for further growth in each of those categories. Let’s say you have two families of the same size and with the same purchasing needs. The first family buys 15 different categories with you an spends $100 per category. The second family buys the same 15 categories but spends only $10 per category. Obviously we need to approach these customers differently.
Most retailers do not have a view of actual wallet share at the customer and category level. This would involve knowing exactly what each customer buys with your competitors. But it is possible to get a good proxy of how loyal a customer is in each category. By comparing customers to the average spend in a category we can get an estimate of how much of their business they are giving to you, and how much is going elsewhere. If we are already using customer analytics to understand the approximate size of the household – for example, by looking at customers that are purchasing baby items or children’s snacks – this can help us be even more precise.
With these two elements in place, we can plot customers in a segmentation that looks like this:
Primary customers are shoppers who buy many categories with you, and in the categories they buy, make most of their purchases at your store.
Switchers are shoppers who buy a significant number of categories with you, but not all. They are clearly shopping with multiple retailers to fulfill their household needs.
The Convenience segment is made of shoppers who are most likely “Primary” shoppers at one of your competitors. They come to you for a few categories, maybe because of your location or some specific brands you carry, but most of their shopping is done elsewhere.
Opportunistic customers are cherry-pickers looking for deals. They might even buy many different categories with you over the course of the year…but there is clearly no loyalty
As mentioned above, the power of this segmentation is that it gives you clear next actions, as indicated by the red arrows in the chart above. Primary shoppers are already buying most categories with you, so trying to cross-sell into new categories will be a waste of time. Instead, the goal is to grow wallet share by getting them to spend more in the categories they already buy.
For Convenience customers, on the other hand, a category cross-sell offer is perfect. They are already in your store. Try to get them to move into a new category with an attractive offer. Look-alike analysis can tell you the categories they are most likely to respond to based on what’s already in their basket. Or you might want to start with categories that are nearly universal, such as produce, household paper, or oral care.
For Switchers, a hybrid of these two strategies is best. You want them to move up and to the right on our segment grid – both buying more categories AND spending more in the categories they already buy.
Finally, Opportunistic customers need a unique treatment. The goal in this case is to get them to buy more of the things they are already buying, mainly by increasing trip frequency. It also might make sense to have minimum spends on some of these promotions, to ensure that Opportunistic customers do not just continue to buy items on sale without putting anything else in the basket.
The basket diversity customer segmentation is a powerful tool for growing your customers. Give it a try. The results will speak for themselves.