If you’re a small retailer, you have to keep a lot of spinning plates at once. Between interacting with customers, handling reorders, managing employees, and everything else, taking time to strategically plan your merchandise can feel out of reach.
We’re here to tell you that even as a small business, nailing your buying strategy is worth the effort and easier than ever before.
Effective stock planning can boost profits, keep customers happy, and cut overhead costs. But what is merchandise planning, and where do you start?
In this article, we’ll cover everything your small business needs to know, including:
- What merchandise planning in retail is
- Why it’s important for your store’s success
- The five basic components of merchandise planning
- Five common challenges and how to overcome them
What Is Merchandise Planning in Retail? A Definition
Merchandise planning is a part of retail inventory management that anticipates demand and allocates resources to make the right products available at the right time.
Retail merchandise planning typically includes:
- Demand forecasting
- Seasonal planning
- Optimizing inventory levels
- Vendor management
- Pricing strategy
- Store layout
Put simply, when a customer comes into your shop and asks, “Do you have X?” Merchandise planning is all the work that allows you to answer with an enthusiastic, “Yes!”
While large corporations and big chains have many advantages in merchandise planning, such as dedicated marketing and research teams, small businesses are not helpless.
Technology has come a long way, and now it’s easier than ever for even the smallest retailers to craft an effective merchandise planning strategy.
Related Read: How To Manage a Retail Store: 6 Steps to Success
Why Is Merchandise Planning in Retail Important?
The goal of merchandise planning is to have the right amount of stock at the right time, place, and price.
Merchandise planning offers a few distinct advantages for small retailers.
- Increases sales: Dialing in a great product selection and pricing strategy will help attract customers to your store and keep profits high.
- Improves customer retention: When you consistently have the types of products that customers are looking for, they’re more likely to choose your store in the future.
- Reduces costs: Taking a strategic approach to what and how much you sell will ensure you don’t overstock items you don’t need, reducing costs.
- Improve marketing ROI: Instead of trying random sales and ads and seeing what sticks, know what products are coming in and plan your marketing strategy accordingly.
Perfection shouldn’t be your goal. However, having even a basic merchandise planning strategy will pay off in the long run.
The Five Components of Retail Merchandise Planning
Merchandise planning might sound complicated, but when you break it down, it’s not as intimidating as it seems.
There are five components of merchandise planning.
- Product: Choose the various items you sell (e.g., staples, seasonal products, fad products, etc.) and have adequate stock.
- Price: Set prices that appeal to a wide range of customers while maintaining profitability.
- Assortment: Choose the product categories you’ll offer and determine how they change with the time of year.
- Range: Decide how many different products you’ll have within each product category (e.g., if you sell whiskey, how many brands of Scotch will you sell?).
- Space: Lay out your store so customers can quickly find the items they want.
Merchandise planning is simply taking a more thoughtful and strategic approach to what you sell, how much you sell, and where you sell it.
5 Common Merchandise Planning Challenges (and How To Solve Them)
Now that you have a basic idea of what merchandise planning in retail is, what’s stopping you? If you’re like many of the retailers we work with, these five challenges may hold you back.
Here’s how to overcome them.
Challenge #1: Lack of Visibility
Demand forecasting, pricing strategy, seasonal trends, and knowing your bestsellers are all at the heart of effective merchandise planning. Unfortunately, these metrics are nearly impossible to track without having a comprehensive view of your store inventory and financial performance.
Perhaps more than any other item on this list, a lack of visibility prevents most small businesses from improving their merchandise planning strategy.
For most, this isn’t their fault. Instead, their reliance on manual processes and disconnected systems prevents them from gaining a holistic view of their business operations.
The Solution
While inventory management and financial reports were once out of reach for small retailers, that isn’t the case today.
Most point of sale (POS) solutions come with these features built-in.
With a modern POS system, every time you restock your storeroom, process a return, or make a sale, your system generates incredibly valuable data that you can use to better understand your customers and gain an advantage over the competition.
A POS system will give you real-time visibility into key metrics like:
- Bestsellers
- Peak hours
- Seasonal sales performance
- Average basket size
- Online vs. in-store sales trends
- Profit margins (by product, by vendor, etc.)
- Supplier lead times
… and more.
This will give you tools to perform post-season sales analyses (i.e., determine what products sold well in a particular time period), create better staffing schedules, and more — all at the click of a button.
BONUS: Tips for Choosing the Right POS System for Your Business
If you’re looking to upgrade your POS system (or implement one for the first time), we recommend looking for systems that include these key elements.
- Comprehensive: Find systems that allow you to manage payments, inventory, employees, e-commerce, and other aspects of store management in one place.
- Easy to use: Even a system with all the reports and other bells and whistles is useless if it’s too complicated to use.
- Industry-specific: Find a POS system that is tailored to your specific industry. These systems typically have useful features and reports that a generic POS system won’t include.
A modern POS system is crucial for gaining actionable insights into sales data, customer behaviors, peak hours, seasonal trends, and more. It will also significantly simplify running your business.
Challenge #2: Not Understanding Your Niche
Simply having visibility into your store’s performance isn’t enough to become a merchandise planning master.
As a small business, you have a lot of competition. People don’t come to you because you offer more than a big chain store; they come to you because you offer something unique — whether that’s the products themselves, the atmosphere, or your expertise.
Understanding your value comes largely from intuition and passion. What made you want to get into this business, and how do you convey that passion to your customers?
If you don’t focus on the products and services that make you stand out, you might fade into the background.
Related Read: The Ultimate Business Plan for Retail Business Management
The Solution
Understanding your niche will go a long way toward determining what products to stock on your shelves. If you know what customers love about your store, you can start to specialize and refine your selection to be truly one of a kind.
Here are a few additional tricks to help you define what makes you unique.
- Visit your competitors: Are there many businesses selling similar products in your area? If so, pay them a visit! Take notes on what products they offer, what they lack, and their strengths and weaknesses.
- Use your sales data: Use the sales data on your POS system to see what products and product categories are selling well (and which provide the highest profits). This will help you decide what types of products to stock more of.
- Define your target audience: Do you sell luxury products and local specialties, or do you primarily sell staples? This will determine the types of customers you want to appeal to.
By understanding these aspects of your business, you can create product lists and marketing strategies that are more specific (and more effective).
In particular, this will help your assortment planning — choosing a range of products that will appeal to your customers.
Challenge #3: Not Having Defined Goals
Every retailer wants to be successful, but what does “being successful” really mean? Setting clear and quantifiable goals is essential for effective merchandise planning.
However, setting realistic and measurable goals is easier said than done when you have no easy way to compare — and you’d be surprised by how your feelings about store performance don’t always match up with reality.
For example, you might have a holiday sale with a flurry of customers that you can barely keep up with, only to find your profit margins were lower than expected. Or, you might find that people avoided your sale items, but you still earned healthy profits in other product categories.
All of this information is invaluable for goal setting.
The Solution
Every quarter, after every major holiday and every big sale, sit down and look at the numbers. Look for differences and trends like:
- What numbers were different in the winter versus the summer?
- Did the increased sales from a discount make up for the lower profit margin?
- How many more customers did you have in a given season?
- Are any product categories overperforming or underperforming consistently?
- What items sold unusually well? Were there stockouts? Did you overstock any items?
- Were there any unexpected shifts in demand? Was it a fad or a seasonal trend?
These are just a few of the questions you might ask, but you can then turn these baseline observations into actionable goals using common retail key performance indicators (KPIs). For example:
- I want X number of customers to sign up for my loyalty program this quarter
- I want to increase the inventory turnover rate in X product section by Y%
- I want to increase profit margins by X%
Once you define your goals, you can come up with ways to achieve them, such as refreshing the store layout, changing he types of products you carry, trying new marketing approaches, or making sure certain popular products remain in stock.
When you try something new, repeat the process — measure the results, set new goals, and try new strategies. The more you do it, the more you can refine your product plan, and the greater return on investment (ROI) you’ll see.
Challenge #4: Being Reactive Instead of Proactive
We’ve all been there. The eye of the storm. Those chaotic moments when an unexpected surge in demand takes us completely off guard.
Suddenly, customers complain that items are out of stock. You try to order them, but by the time they arrive, it’s too late—they’ve gone somewhere else. The cycle repeats, and by the end of it, you’re left with too many of some things and not enough of others.
In these situations, your only choice is to slap together a quick sale to move your overstocked merchandise and hope for the best.
Unfortunately, a reactive approach to demand can increase overhead and lose customers.
This is especially true for small businesses. If a big chain runs out of an item, people will still come back. If they take a chance on a small business only to find an item is out of stock, they probably won’t come back.
The Solution
Demand forecasting is the practice of comparing trends in your sales data with external factors, such as seasons, holidays, events, weather, and more. These comparisons yield trends that can help you anticipate surges in demand.
For example, a grocer might see that sales of particular herbs and meat increase dramatically around Thanksgiving and other holidays. Knowing that information, they can prepare to order more of those items in advance.
In other words, you can start being proactive instead of reactive. Use inventory forecasting features on your POS system to see which items you should stock up on.
On a day-to-day level, you can also use your supplier lead times and inventory management system to set low-stock alerts for popular items. This will enable you to reorder at the right time to help optimize inventory levels.
Challenge #5: Not Knowing How To Update Your Store Layout
Many store owners instinctively lay out their store in a way that makes sense to them — and that’s not a bad way to do it — at least in the beginning.
However, as you get to know your customers and their preferences, it’s important to change things up. When customers can’t quickly find what they’re looking for, they might go somewhere else.
If your business doesn’t focus on visual merchandising, you may see sales drop, even if you have a great product list and the expertise to back it up.
The Solution
Your store isn’t just the products you sell but where those products are and how you present them. An effective store layout ensures that customers find what they’re after and are enticed with deals and offers.
Here are a few common examples of visual merchandising and store layout techniques.
- Cross-selling: Place complementary items near each other to encourage a customer to make an impulse buy. For example, putting wine decanters on the endcap of a red wine aisle.
- Signage: Use eye-catching signage to help customers navigate your store, see sales items, and learn about unique offerings.
- Aisle placement: Place staple items in a way that is accessible yet encourages customers to browse.
- Displays: Set up tables and standing displays to highlight seasonal sales and new products, or encourage impulse buys.
There are many strategies to employ, but experiment and see what works for you.
Last, like everything in merchandise planning, don’t just change things around for the sake of it. Have clear goals in mind when you update your layout and measure their success.
One useful metric you can use is sales per square foot.
This tells you how much revenue is generated based on the physical space in your store. If your product sections are clearly defined, you can use this to see which spots in the store are over or underperforming.
Make Better Retail Merchandise Planning Decisions With an Industry-Specific POS System
Merchandise planning isn’t just reserved for big businesses with bigger budgets. With the right tools and the passion to meet your customers’ needs, you can craft an effective retail merchandising strategy with ease.
Just like you wouldn’t use a hammer to fix your phone or a saw to fix your car, your business needs a system tailored to your specific industry to deliver the most value.
At POS Nation, we work directly with small businesses across industries to find the software and hardware that are the best fit for their unique needs. With solutions tailored for boutiques, grocers, liquor store owners, electronics repair, and more, we deliver industry-specific and cost-effective solutions for any style of business.
Schedule a demo today to see how a solution tailored to your industry can help you anticipate demand and crush the competition.
