Market basket analysis is a data-mining algorithm common to marketing. It identifies customer purchasing habits by analyzing previous purchases to determine items they buy together, the frequency of purchase and the order of purchase. This information is useful for allowing companies and retailers to redesign the layout of stores, e-catalogs and websites, and devise effective promotional strategies.
Predicts Customer Behavior
Consumer behavior is complex and unpredictable -- what appeals to one buyer may not appeal to another. Consumer buying habits change with time, age, income level, and it also differs between the sexes. Buying patterns fluctuate seasonally in the retail industry. For example, customers purchase fresh peaches in the summer while the demand for pumpkin pies and turkeys is higher during the autumn. Market basket analysis predicts similar customer buying behavior and preferences by analyzing checkout scanner information and Websites. The information helps forecast future buying trends.
Used for Target Marketing
Market basket analysis is useful for target marketing. It helps classify customers by age group, gender and other demographic characteristics. For example, market basket analysis reveals that white women in their 60s are more likely to purchase anti-wrinkle cream than Asian women of the same age. Marketing departments use this information to effectively market anti-wrinkle creams and related promotions to older white women.
Increase in Retail Sales
The most obvious advantage of market basket analysis is an increase in sales. Retail stores use the information to reorganize products to optimize shelf space and customer time. Products customers buy together are found together. This strategy facilitates impulse buying, ensures customers do not forget items and increases customer satisfaction. For example, retailing giant Wal-Mart found that male shoppers who bought diapers also bought beer. These purchases were often made on weekends. Wal-Mart used this information to offer beer and diapers together and the result was a significant increase in sales.
Helps Design Promotional Strategies
Market basket analysis helps marketers design successful promotional strategies. For example, customers often purchase diapers and milk formula together, so stores may offer discount coupons to customers buying both products. Direct marketers use market basket information to contact active customers and offer discounts on products and services. They also use the information to cross sell additional products and services, and sell higher-level products and services.
A store can effectively stock up and manage its inventory when it knows the types of products customers are likely to purchase together. This brings in overall cost savings for a company as it reduces the possibility of duplicate ordering, improves the return on investment and facilitates better customer satisfaction. Market basket analysis also helps companies forecast inventory and order stock.
- New York University: Market Basket Analysis Techniques
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- Comstock Images/Comstock/Getty Images