The Customer Decision Hierarchy (CDH), is essential for shaping categories and stores that will appeal to the evolving needs of the customer into 2021 and beyond.
So let’s look at the customer decision hierarchy, its role in customer-centric retailing – and how retailers can put the findings into practice.
The CDH shows us the process a shopper follows when making a purchase from a category and – crucially – the order of importance in the eyes of the customer.
Through market research, you can build a view of the decisions that shoppers make in store, although there are limitations with this approach. Decision-making is generally subconscious, so it can be difficult for shoppers to accurately explain what they do and why. This method can also show bias, as it’s not uncommon to find differences between how shoppers claim to behave in store – and the reality.
Due to the challenges of getting customers to accurately describe their decision-making process, retailers turn to behavioural data-led approaches. Using loyalty card data, they can gain a more accurate reading by assessing shopper purchase behaviour over time. And crucially, this approach demonstrates the level of ‘substitutability’ between individual products.
Substitutability data collated across all purchases in a category gives a view of how customers engage and switch between products over time. This vital piece of the puzzle helps retailers map key decision points in order to generate a full decision hierarchy. It’s a robust and well-established approach, used by retailers and CPGs around the world as a core foundation of their category management processes.
Now let’s look at how to apply CDH discoveries to in store merchandising.
Shoppers want a simple shopping experience. They want to be able to quickly find their way around a category to locate the product they want. And they generally have a fixed ‘time budget’ to spend in store – so any minutes spent getting lost or confused may mean fewer items in the basket and a lower overall spend.
If the external structure of a product category matches the shopper’s internal categorisation, the shopper feels more satisfied with the variety of choices. By reflecting the decision-making process, you help shoppers navigate the category and find their product more quickly.
Equally, if the shopper’s usual purchase isn’t available, they should be able to quickly find a suitable substitute nearby or within their field of vision – allowing retailers to effectively offer up alternative selection at the shelf.
A mixture of words and imagery is most effective for communicating the location of category segments in the aisle. The mere presence of category labels within a product assortment increases shopper satisfaction, especially when they are shopping an unfamiliar category.
Retailers find it helpful to understand complementary relationships between key decision groups. With complementary categories – such as soft drinks and snacking – layouts that encourage cross-purchasing through adjacency can drive shoppers to make incremental purchases, increasing overall basket size and value.
Benefits of merchandising based on the customer decision hierarchy;
The CDH is also important when it comes to defining the minimum credible assortment for a category. This covers the chosen items that fulfil the broadest set of customer needs within a particular category. It includes an item from each major customer decision group, as defined by the CDH. This is particularly useful when shaping assortments for the smallest store formats, such as convenience stores and petrol stations.
The minimum credible assortment ensures you get the correct assortment breadth. It’s important to include an offering across all the highest levels of the CDH before moving down to and extending the assortment across the next levels of the hierarchy.
You achieve assortment depth by offering multiple choices from the lowest levels of the decision hierarchy. This is only appropriate once you achieve assortment breadth and generally only for the largest store formats with enough space to offer an assortment featuring both breadth and depth. This is key to offering an assortment that fulfils the broadest set of customer needs.
Tracking how the CDH evolves over time is a real ally to any category manager who needs to understand new and emerging customer needs. It highlights where there is ‘white space’ offering the potential to develop and launch new items.
A category might exhibit different pricing tiers across most of the major category decisions. If a decision in the category is missing a low or high-priced option, this could be an opportunity for retailers to develop a new item to fill this white space. Retailers have often spotted categories that are lacking a high tier product offering – and have either brought in new brands or created their own premium range of items with great success.
The customer decision hierarchy provides valuable insight on how to structure a balanced promotion plan for the category.
If promotions are concentrated in one part of the decision hierarchy, there is a risk of cannibalisation, as all items available for a given customer need will all be available at a promotional price. A balanced plan offers a spread of deals across the highest levels of the customer decision hierarchy, to deliver a broad set of offers to maximise appeal to customers and minimise the risks of cannibalisation.
It can sometimes make sense to concentrate promotions in one part of the decision hierarchy. For example, to drive customer awareness and trial of an emerging premium segment that will drive growth and incremental value to the category. Equally, where brand is a primary decision, it makes sense for variants of that brand to be promoted together.
Over the last few months we’ve seen a fundamental change in patterns of customer demand, so the time is ripe to reassess. Understanding how the decision tree and category structure has shifted in the past year is vital to understanding the shift in customer demand. Retailers that gets to grips with their own customer decision hierarchy will make for more robust category and brand plans for customers going into 2021.
If you’d like to find out how we can help with your category plans, contact us now.