Classifying products based on cash receipts

For profit margin and price-image management

This article presents an overview of an analysis carried out by the data scientists from Mercio. Our experts rely on the latest technologies and develop their own tools to help retailers to answer complex and interdisciplinary issues.

Through the analysis detailed here, we wanted to offer some credible and concrete ways to solve one of the recurring problems encountered by our customers: How to create a classification system for their products that is not based only on obvious characteristics but rather takes into account customers’ expectations, all while managing tens or even hundreds of thousands of items? How can our clients use these results to improve their pricing and merchandising strategy? How can they price new products for which there is no sales history or comparison with competitors? Mercio teams found an innovative approach to answer these questions.

The approach of this data science study

The Mercio team assumes that modern data science tools, which can quickly and automatically analyze large volumes of data at an industrial scale, have the potential to replace or complement lengthy and costly qualitative or statistical studies. This can be achieved by tapping into a valuable source of information that all retailers have: receipts.

For this use case, we relied on data from the parapharmacy sector, which stands out for two key characteristics: the large number of product references to manage and the difficulty in comparing products across competitors due to the vast variations in packaging, quantities, brands, etc., from one retailer to another. We worked with several tens of millions of anonymized receipts, representing approximately three months of activity from a leading distributor in the sector in the United States.

Our data engineers developed and tested an original automatic classification algorithm. For this analysis, they relied on tools they had developed themselves. The model was then tested and validated by applying it to other sectors as well.

Methodology

The first layer of the algorithm classifies the products and assigns them a score based on whether they are purchased:
- Always with at least one other product (score of 0)
- Always alone (score of 1)
- In between (from 0 to 1)

The second layer goes one step further: it ranks products based on their tendencies to be most often purchased:
- With a limited set of products (higher)
- With a limited set of products (higher)

The third layer combines these two indicators to define the following three categories:
- "Driver” products: These products are bought sometimes alone, but more frequently with complementary products. These are the products that bring customers to the store. Their prices are more likely to be compared and not finding the product on the shelves can lead customers to leave the store without any purchase. Examples from drug stores: baby diapers or shower gel.
- “Complementary” products: These products are rarely bought alone, they are more likely to be purchased with Driver products: either because they are purchased on impulse or because their usage is complementary.For instance, sponges are more likely to be purchased with shower gel.
- “Independent” products: They are bought alone most of the time. In drug stores this is the case with exclusive beauty or health products for instance.

An almost instant return on investment

During this analysis, most of our data scientists’ time has been spent conceptualizing the relevant indicators and then analyzing the results. The cutting-edge tools they used – and in some cases developed -, made data loading, visualization and computation a lot faster, taking at most a few minutes, even on massive datasets. Thus they were able in this way to draw actionable insights that can be leveraged through several optimization strategies with an almost immediate return on investment:

Increase the value of the average basket
By increasing the margin of the complementary products, for example with a maximum + 20% price cap compared to the competitors, a brand can retrieve several hundreds of thousands of euros of additional margin without damaging their price-image.
Improve the price-image to develop the volumes
By lowering the price of sensitive products and by increasing the price of complementary products, the brand increases its attractiveness without damaging its total margin.

As an extension of this analysis, we can envision several ways to push optimization further:

Replicate the method at the a store level, for each individual drugstore – we are likely to find various customer behaviors between suburban and downtown stores, for example.
Identify and classify «Sensitive product + complementary products» groups within a category and cross-category to improve merchandising.
Cross-reference these insights combined with data from the retailer’s e-commerce website to further refine results. Website data would for instance tell which products are more likely to be added in a basket first, which ones are rather seldom added first and finally which ones are often bought alone.

Towards predictive pricing for new products and marketplaces

This experiment shows how data science can bring valuable, immediately actionable insights to optimize retail pricing.

Combined with a flexible pricing engine able to translate these insights into price rules,data science allows a predictive rather than reactive approach to pricing. By identifying the relevant product attributes related to a specific buying behavior, and classifying products according to those results, we can set prices for new products or for marketplace products without having to rely on sales history or competitive alignment rules.

Going further with Mercio:

Mercio’s price optimization software is designed to bridge the gap between marketing insights and pricing strategy. This means that each retailer can express their own business logic in a flexible and scalable solution, while benefiting from a solution developed according to the best pricing practices in retail. Discover the presentation of the Mercio platform in the"Our solutions” section.