What Is Category Management & Why Is It Important?

By Priceva
on April 13, 2023
How can you reap maximum profit out of your existing product lineup and promote your goods more effectively? These tasks are solved with category management, a practice in retail and e-commerce businesses in which related products are grouped together to manage their performance more efficiently.

When a business grows to a certain level, it has to work with thousands of SKUs across various departments – category management helps them do it correctly. This article explains how it works, and why businesses should stick to the principles of category management.

What is category management?

Category management refers to the administration of an assortment in retail by grouping goods into categories that share traits or goals. As an example, suppose you organize your store's shelves using the category management principle: one shelf includes just dairy items, another only meat products, etc. The growth in sales of products in a certain category and the profitability of those sales serve as the primary indicators of category management.

Therefore, category management's job is to simplify the retail environment so that it is more practical and effective for both the business and the customer. Additionally, category management seeks to boost earnings and sales.

The 4 Ps of category management

Product, pricing, placement, and promotion are the four Ps of category management. Let’s observe them in detail.

Product

The performance of a category begins with the strategic sourcing of its products. Of course, category managers’ primary task is to roll out products on the shelves, but a successful category management process also includes thorough analysis and processing of product data. It all boils down to bringing in the appropriate goods at the appropriate time and price. Category managers base their purchasing selections on prior sales figures, customer patterns, and seasonal predictions.

Pricing

Category managers use wholesale amounts to reduce prices when they purchase items. Additionally, they make purchases for the whole category to achieve a better per-unit cost.

Category managers must also compare the goods and costs offered by various vendors for their categories. Here, wholesale and retail prices should both be taken into account. The wholesale price is the item's business-to-business (B2B) cost. Then there is the retail price, also known as the business-to-consumer (B2C) pricing, which is the price tag for the customer. The purchase price, any additional expenses (shipping and logistics), and the retailer's goal margin combine to create the retail price.

An additional piece of information that aids the merchant in setting pricing is the manufacturer's suggested retail price (MSRP) that products have. Retailers must ultimately compare their prices to competitors’ prices for comparable items in order to remain competitive.

Placement

To determine the optimum strategy for classifying their assortments into unified categories inside the store, category managers must work in tandem with merchandising teams.

A smart category management system not only keeps track of these assortments, but also takes into account the thoughtful arrangement of complementary goods for logical coherence within the aisle. This is done to increase sales.

Retailers frequently put new products and specialty goods on end caps and other prominent displays. In order to maintain and update the most effective planograms (schematic drawings that show your store's shelves and products), a healthy category management process links assortment planning with merchandising teams.

Promotion

Marketing strategies used to increase sales include retail promotions. Retailers must participate in promotional efforts both before and after things are on sale to increase sales. The majority of retail promotions rely on the customer's sense of urgency and reasoning to convince them that they need the goods.

Sales promotions are influenced by a variety of elements, such as inventory, seasonal relevance, sales success, and rival promotions. The category management team must predict how their category will perform, look for chances for promotions, and modify the strategy in light of product performance.

Finally, a category manager will employ a variety of promotional strategies to boost those goods' sales, increase their sell-through rates, and, if required, manage surplus inventory.

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Examples of category management

To illustrate category management, let us take an online store that sells clothes. It can divide goods into the following groups:

  • Clothing: Pants, shorts, skirts, t-shirts, and shirts
  • Accessories: Headwear, jewelry, backpacks, and luggage
  • Shoes: Sneakers, boots, and high-heels
  • Winter clothing: Jackets, hats, mittens, and umbrellas

Each category can have its own subcategory thanks to category management features (which can be analyzed separately from other subcategories or combined with them). The main goal is to enhance the client experience. This kind of layout makes it simpler to go around the store, look for particular items, and make decisions.

Eight steps of category management

The process of category management goes well beyond distributing items into several groups. Here is a step-by-step explanation of what category managers do.

Category definition

The vendor starts with dividing the goods into groups based on their functions, traits, customer popularity, accessibility of packaging, and/or any other factors. The challenge of what criteria to employ to create categories may emerge in this situation. You should only consider the objectives and nature of your brand, your preferences, and your resource availability.

The merchandise hierarchy of products in the retail industry includes departments, categories, classes, and subclasses. So, a retailer has the option of either starting the category management process at the product department level (for example, Men's Clothing, Women's Apparel, Kids, etc.) or going all the way down to the level of product categories.

The role of a category management strategy

The seller then compares the categories to the demands of the purchasers to assess the relative relevance of each category, ultimately prioritizing the categories. The greater the demand or the significance of the items to the consumer, the greater the category’s importance. Additionally, this data is frequently utilized to provide a foundation for future resource allocation within the company.

Certain items are the backbone of the company, helping to increase transaction volume and mold the retailer's primary brand identity and positioning. The retailer's core items make up the majority of its sales mix. Other products act as a destination or as "traffic drivers," as we like to say. These don't add much to the company's overall sales, but they do help draw both new and returning customers to the stores.

Category evaluation

The seller does a category-specific study, taking into account supplier data, overall profitability, economic profitability, and the quantity of sales of the items falling within the category. Different analytical techniques that can accurately assess the advantages and disadvantages of each category and its future prospects will be needed for the examination.

You can analyze the category from different standpoints: sales volume, gross margin, sell-through rate, inventory turnover, GMROI, and so on.

Defining the effectiveness of the category

The vendor establishes detailed specifications and standards for assessing category performance. It is necessary to identify indicators that can be measured both quantitatively and qualitatively. For instance, the quantity of sales, purchases, margins, and cost recovery ratio (GMROI) are frequently considered. On the basis of the analysis you conducted in the previous stage, you will then create your new objectives. For each indicator you wish to improve, you will define precise, quantifiable goals so you can compare the category's performance at the end of the year.

Developing a strategy for each category

The vendor sets objectives for each category and streamlines company operations to help them achieve their full potential. Planning resources sensibly for efficiently advertising and selling various product categories is the major goal of strategy development.

Developing category tactics

At this stage, the category manager determines the category selection, pricing, and product shelf space in detail (which is also crucial for the correct implementation of the strategy). The technique also specifies the precise steps that must be taken in order to accomplish the goals of the category strategy.

Category implementation

The store consistently follows a timetable and task list to carry out the category strategy. As a consequence, the plan is carried out according to the predetermined goals without any last-minute modifications or alterations, which is crucial for any category management strategy.

Implementation can be done directly by the category manager or their team, or might require collaboration with other parties, such as suppliers, store managers, visual merchandisers, etc.
So while setting the plan to assign roles for each tactic, make sure your plan is realistic and you have appropriate expectations from other parties.

Category revision

At this point, the vendor and the supplier analyze the category and assess the viability and efficacy of the actualized business strategy. If any fresh possibilities or dangers to the category are discovered, they build and implement a backup plan. Once more, this aids the business in selecting the most effective tactics.

The advantages and disadvantages of category management

Why should businesses practice category management? It has a few undeniable advantages:

  1. Due to the convenience and visually appealing variety of the assortment, it improves customer satisfaction with the store.
  2. It helps raise average check, customer loyalty, and overall sales.
  3. Cooperation with business contacts and suppliers is simplified.
  4. The amount of illiquid inventory is reduced.
  5. The company's reputation is improved.

At the same time, category management is not devoid of drawbacks, such as:

  1. Staffing challenge. A category manager should possess the appropriate information, including marketing expertise, a grasp of product management, analytical abilities, and financial awareness. Finding such experts is not as easy as it seems.
  2. Chain selection and inventory management procedures. The supply chain itself and the number of analysis objects both increase in line with the quantity of goods and company interactions. A category management strategy is therefore inappropriate for established retail chains that use many formats.

Category management tools

Any marketing strategies that enable the retailer and business owner to fully comprehend consumer demands, their perceptions of the selection, suppliers, and the advantages of the items themselves can be used for a category management strategy. Even simple math is useful in this situation; however, the following are the most frequently employed category management tools:

  • SWOT analysis (a type of strategic planning) reveals the advantages and disadvantages of a company, a defined category, certain items, and even the customer.
  • PEST (Political, Economic, Social, and Technological) analysis is a strategic technique for analyzing the external environment and spotting dangers and market trends.
  • Retrospective analysis and discussion of previous performance is a technique for enhancing present business operations and evaluating suppliers.
  • A/B testing serves to estimate the effectiveness of a category, category plan, category promotion, etc.
  • Conducting a survey or questionnaire makes it possible to explore customer needs to determine strategy, tactics or categories.
  • A decision tree is an effective tool for managing retail categories because it gives the company an insight into how its customers browse, evaluate, and select goods from their categories. It helps businesses tailor their pricing and advertising techniques to better suit the preferences and demands of the target audience by outlining the characteristics, advantages, and trade-offs that affect customer behavior.

Category management considerations

Category management's primary objective is to devote more time and resources to each category in order to maximize its efficiency and the performance of the entire company,

Since category management is leveraged in larger businesses (for example, retail or e-commerce business), but the categories are managed separately, the top level management of the company should make sure that the various categories do not compete with one another.

It is crucial for each separate category to convey a consistent brand image and help businesses support their pricing strategies. If you need to manage a large number of items and make sure that all items in separate categories are priced optimally, it is also important to analyze competitors’ rates, because they serve as market benchmarks. There’s no need to perform such analysis manually – just implement the product matching tool by Priceva. It will help you find items by SKUs and different parameters, presenting tons of data in a comprehensive form.

FAQ

Why was category management created?

Retailers can minimize organizational spending, enhance category sales volume, and discover significant value categories with the use of a category management strategy. Also, businesses can assess new options for procurement cost control and boost profit margins.

What is the role of category management?

In the retail sector, category managers are often in charge of increasing sales of a certain product category. Category managers frequently work in the fields of inventory, pricing, marketing, and vendor management.

How can someone become a category manager?

A category manager needs to have in-depth knowledge of customer demands and the retail industry. They need to be business-minded and fully understand the fundamentals of sales and marketing. For category managers, excellent communication skills are also essential.

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Take charge of your pricing strategy with Priceva's powerful price tracking tools.
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