Updated August 2021 - New Bonus Section: 4 Ps of Category Management
Category management is critical to optimizing the way your retail organization accesses products, understands product relationships, and executes the procurement process with increased efficiency.
We’re all looking for the best path to sourcing products efficiently and increasing our margins. For your purposes, category management will help these initiatives as well as provide repeatable processes for internal and external communication. If you’re looking to improve your business’s merchandising process, this is the place to start.
In this article, we’ll give you a breakdown of category management, along with 5 tools for implementing an effective merchandising process. Here’s what we’re covering along with some quick links to find the info you need:
What is Category Management?
First, What’s a “Category”? A category is essentially any group of similar items that a company wants to buy under the umbrella of a single deal.
“Category Management” is the process of pooling similar products into a singular category and then addressing all business initiatives for that category as a whole. These initiatives can include the procurement process, merchandising, sales and other retail efforts.
At its most basic level, you can think of category management as a way of bundling like items to avoid separate, scattered agreements. This saves time, money and resources by consolidating disparate agreements into a single contract.
Let’s dive into a practical example:
You’re a sporting goods retailer looking to bolster sales ahead of little league season. You have a procurement team dedicated to your baseball department ready to source products.
Without category management, you may end up with your buyers negotiating one-off agreements. Suppliers can take advantage of your urgent need to source baseball equipment, which can drive up per-unit pricing.
Why have separate buyers negotiating single contracts for bats, gloves, balls, protective equipment and soft goods, when you can negotiate them together? Bundling those goods into one category and agreeing upon a single contract allows your organization to better track negotiations, drive down pricing as the single order contains more units and cut down time and resources to negotiate these agreements.
Category management was coined by Brain F. Harris in 1997. The methodology was intended to improve upon strategic sourcing, which missed key components for maximizing efficiency. Harris’s project management approach is structured, measurable and drives improvements across an organization’s processes.
According to Harris, you can best implement and maintain category management with the following 8-Step Cycle:
- Step 1: Define the Category – Set the parameters for your category based on your customers’ behavior. How do they navigate the category? This will help inform product selection, segmentation and more.
- Step 2: Assess the Category Role – This is where you keep an eye on the category in relation to your company’s broader portfolio. What is its overall importance and impact? You can think of this from a sales perspective as well as from a volume standpoint.
- Step 3: Track Performance – Assess how the category is performing from different angles. Performance at the retailer, within the market, compared to other categories, etc. This multi-lensed approach will provide balanced information for the next few steps.
- Step 4: Set Benchmarks and Objectives – Any business initiative should have clear goals outlined to drive success. Your merchandising plan is no exception. Define your benchmarks and objectives to set the category’s KPIs. Sales, volume, market share, and assortment are good places to start.
- Step 5: Plan Strategies – Based on your defined goals, gather your thought leaders and devise your strategies. Consider what marketing angles your organization can take and what the in-store presence will be like for the category. You should continue to keep your eye on how you can: grow market share, increase sales, boost foot traffic (and other specialized goals for your industry).
- Step 6: Designate Category Tactics – This is where you should get into the nuts and bolts of how you can put your strategies into motion. Set clear and repeatable actions to improve category strategies. Consider how to improve products, placement, promotions and supply methods.
- Step 7: Implementation – Once you’ve set your strategies and identified your tactics, you’ll want a tangible plan for your team. Create a written plan to solidify tactics, category role, strategies and objectives.
- Step 8: Review – This isn’t a one-time procedure. It’s designed to be a cycle for you to constantly review and tweak your process. In this final step, measure your results and modify the process where you can as you cycle back through the steps.
Why Was Category Management Created?
To better understand why category management was created, let’s take a look at the industry problems it solves. Before category management, when buyers and sellers collaborated to produce a product, the result was chaotic – leading to delays, waste and sub-optimal output. Think of our sporting goods example earlier; you don’t want to leave the ball in the supplier’s court to set prices and diminish your margin on an individual basis. Category management fits into the scope of the overall merchandising management process; learn more about the process in our merchandising software blog.
From an internal standpoint, you want to have a method for creating order and defining responsibilities for your team. You’ll find this much more difficult without a category model. With these challenges in mind, Brian Harris created category management to address the following seven key areas:
- Force consumer focus when making retail decisions. Think of a department store. When you look up, the signs you see for their departments can give you insight to their category management hierarchy. These should be strategically placed and organized for the average consumer.
- Develop a strategy for differentiation and competition. The better organized your categories are, the more you can control your price when sourcing.
- Provide a model for collaboration. Organizing by category will inform your team on how to collaborate internally and externally with suppliers. Learn more about how your team can engage 3rd party partners in our supplier management article.
- Promote information sharing to improve decision making. When you break away from a siloed procurement model, information should be open and accessible for all involved across the category.
- Provide greater strategic logic when making tactical decisions. It’s easier to adjust or even pivot your strategy for a category as a whole when all agreement info and data is available in one place.
- Clarify decisions about asset and resource allocation. Think of category management as another way for you to better organize the time and personnel you’ll need to complete all objectives for the category.
- Further clarify employee responsibilities. After organizing your procurement plan into categories, you can easily group personnel into those categories and better define their roles to achieve your goals.
Category management serves as a process to guard your organization against chaos; it’s a common language for buyers and sellers to participate with designated inputs and outputs. This leads to predictable and manageable results. In turn, you’ll be moving toward a win-win balance for your supplier-retailer relations.
How Has Category Management Evolved?
To better understand the value of category management, it is important to look at where it came from. You may be familiar with strategic sourcing. Though the two have similarities, category management evolved from strategic sourcing.
The Brian Harris model refined the process of strategic sourcing by finding its weak points in organization and communication. Here’s a snapshot of the shifts over time:
Typically, an organization’s buying team functions as the gatekeeper for suppliers. Their preferred method of procurement being a Request for Quote (RFQ) to compare suppliers and their products/services. In the silo model, these RFQs are often created on an individual basis, to fulfill an immediate need. This neglects the bigger picture of related products.
Aside from working with suppliers, the buying team has direct relationships with legal, finance and other key departments. They also engage with business reps, often in an ad-hoc, project-specific way. Suppliers communicate with these same stakeholders, usually without the buyers being present or aware. You can see where this model leaves gaps in communication and efficiency.
Category management breaks this siloed thinking. By designating your categories and the teams responsible for the necessary functions, you are maximizing efficiency with a clear and defined common goal. This process includes an open discussion by all stakeholders to optimize and streamline the supply chain for a given category.
Here’s a visual aid for understanding the difference between communication with traditional procurement (strategic sourcing) and communication with category management.
It’s time to start thinking about your organization from a category standpoint. By clearly defining these categories and following the 8-Step Cycle detailed earlier, you can begin to improve your workflow and increase profits.
Ask yourself the following to get started:
- How can I group and organize my similar products into defined categories?
- How would I organize my categories into a hierarchical structure? Do I have product segments that are more important than others? How do I define their importance?
- What are the steps for my team to go from the RFQ process to finalizing a purchase order? How is information shared between organizations? What steps (if any) are redundant?
- If product development and product lifecycle management is part of your process, how does that fit into the questions above?
- What other internal departments do my buyers deal with to finalize a purchasing agreement? Do my suppliers have separate conversations with these departments?
Jot down the answers to these questions and think about them in relation to what you’ve learned in this article. This should help you identify which processes you can adjust to fit into the category management model along with how to know which tools you need below.
The 4 Ps of Category Management
If you’re familiar with the core principles of product marketing, this may sound familiar to you. Great category management strategies are built upon 4 essential elements of successful products. These make up “the 4 Ps of category management,” which include:
#1 - Product
A category’s performance starts with the strategic procurement of goods. Of course, category managers need to bring in products to stock shelves, but detailed analysis and product data are all part of a healthy category management process. It's all about bringing in the right products, at the right price, at the right time. Category managers use previous sales reports, consumer trends, and seasonal forecasting to inform their buying decisions.
Let’s dive into an example. If a category manager for a clothing retailer is looking to bring in affordable bottoms ahead of the next season, there may be a great pair of wool trousers that have historically sold well from one of their suppliers. Market feedback suggests that demand for these trousers is high among working adults between the ages of 30-45. The supplier is offering them at a great wholesale price, so everything points toward a win for the category manager. The only trouble is Spring and Summer are ahead and procurement is focused on outfitting the store for those seasons. Though the wool trousers are ideal for business people in Fall/Winter, they are not a good fit for the warmer seasons.
This underscores the importance of the category management process needing all financial and consumer trend data points to line up with seasonal buying. Category management is a dynamic, timely process that demands careful planning for the best product assortments.
#2 - Pricing
This one is fairly straightforward. When category managers buy products, they leverage wholesale quantities to drive down pricing. They also purchase for the category as a whole to get better per-unit pricing - as demonstrated in our sporting goods example.
Category managers also need to shop around from different suppliers to compare products and prices for their categories. There are 2 price points to consider here: wholesale pricing and retail pricing. Wholesale price is the business-to-business (B2B) price of the products. Then, there’s the retail price which represents the price tag for the shopper, or business-to-consumer (B2C). Retail price is informed by the purchase price and all other costs (shipping + logistics), or "landed cost," along with the target margin for the retailer. Products come with a manufacturer’s suggested retail price (MSRP), which is another data point that helps a retailer set prices. At the end of the day, to stay competitive, retailers have to consider their margin compared to competitor pricing for similar products.
#3 - Placement
This is where we get into planogram software. Category managers have to collaborate with merchandising teams to figure out the best way to organize their assortments into cohesive categories within the store.
Not only does a good category management system keep track of these assortments, but it also considers strategic placement of complementary products for logical continuity within the aisle. This is intended to bolster sales. For example, the baking aisle at the grocery store will group flour, powdered sugar, cake mixes, oils, baking soda/powder all in the same general area. This is to help with the customer experience as well as to boost sales. With all ingredients that are commonly used for baked goods in one place, customers are more likely to remember all the items they need and possibly stock up on even more than they need.
Retailers often place new items and specialty items on end caps and other visible displays as well. A healthy category management process connects assortment planning with merchandising teams to maintain and update the best planograms for business.
#4 - Promotion
Retail promotions are marketing tactics used to drive sales. Before products hit the shelves and after they have been on sale, retailers have to engage in promotional activities to accelerate sales. Most retail promotions appeal to logic and urgency for the customer that ignites a need to purchase the product.
Many factors go into sales promotions, including: inventory, seasonal relevance, sales performance, and competitor promotions. The category management team has to forecast the performance of their category, identify opportunities for promotions, and adjust the plan accordingly based on product performance.
The 5 Best Tools for Category Management
Once you’ve considered the previous questions, it’s time to identify the tools that you’ll need to accomplish your goals. We have suggestions for an all-in-one solution as well as some a-la-carte tools that you can add to your daily operations.
1. Surefront Unified Collaboration Management Software
First, we’ll start with an end-to-end solution for your merchandising needs. Surefront provides industry-defining software that will help with everything we’ve detailed in this article and more.
The live catalog features set you up with easy-to-use tools for importing all of your SKUs and categorizing them. Once you import your products, you can upload photos, include specifications, and pricing details for both internal and external use (you have the control to designate the info).
As a retailer, these tools are tremendous in establishing category management and streamlining your merchandising and procurement processes. Surefront gives you the ability to create internal structure for your teams along with the ability to collaborate with outside organizations all in one place.
This software eliminates the need to email spreadsheets, PDFs, RFQs, notes and purchase orders to outside entities. Surefront brings all of this on one platform to improve productivity, eliminate waste and increase profitability. Sounds pretty similar to the goals of category management, right?
2. Assortment Optimization Software
When sourcing for brick-and-mortar retail, the products that are available at stores are important for the shopping experience. With assortment optimization software, you can take your category management to a more focused level. Identifying customer segments along with the products that best serve those segments is crucial.
Retailers have moved toward offering assortments that align with local shopper preferences and values.
3. Planogram Software
Both retailers and suppliers use planograms to show how products should be displayed. This helps with determining how much space they should be allocated. Planogram software goes nicely with your assortment optimization. As you identify the products for your target segments, you can think about how your consumer encounters those products on the shelves or in the aisles.
Drawing a logical link between products in physical space is going to increase sales. Think of chips and salsa being displayed next to each other. The logical link between the two promotes a single customer purchasing both even though one is a snack and the other is a sauce (which could belong in different locations).
Planogram software helps with planning these logical connections and tactical displays.
4. Promotion Planning Software
Promotion planning software is connected to the space planning tools above. Top retailers use store promotion planning to improve supplier involvement and in-store promotions. This helps you create a strategic plan to earn additional revenue from suppliers.
From a category perspective, this can help you better align your procurement methods with your promotional plans to squeeze the best margins out of your products.
5. Retail Analytics Software
Knowledge is king. With retail analytics software, you can get an idea of how your categories and product segments are performing at the store level. This is what elevates the top retailers as they use data to understand consumer trends and needs.
The more you can connect multiple data sources for your categories, the better you’ll be able to merchandise like a pro.