Market basket analysis

Market basket analysis identifies customers purchasing habits. It provides insight into the combination of products within a customers 'basket'.

The term 'basket' normally applies to a single order. However, the analysis can be applied to other variations. We often compare all orders associated with a single customer.

Ultimately, the purchasing insights provide the potential to create cross sell propositions:

• Which product combinations are bought
• When they are purchased; and in
• What sequence

Developing this understanding enables businesses to promote their most profitable products. It can also encourage customers to buy items that might have otherwise been overlooked or missed.

Market basket analysis delivers the "Amazon effect" to your business. When you place an order on Amazon, a list of potentially interesting products (based on a profile of what other "similar" customers have ordered) is presented. They are seeking to encourage purchase of additional items and thereby increase average basket value.

The following, often quoted, example illustrates the benefits of understanding purchasing habits.

Beer and nappies

The oft-quoted example of what can be achieved is the case of Wal-Mart, a huge US retail chain (owners of Asda in the UK). An observant store manager discovered a strong association for many customers between a brand of babies nappies (diapers) and a brand of beer. Analysis of purchases revealed that they were made by men, on Friday evenings mainly between 6pm and 7pm. After some serious thinking, the supermarket figured out the rationale: Because packs of diapers are very large, the wife, who in most cases made the household purchases, left the diaper purchase to her husband Being the end of the working week, the husband and father also wanted to get some beer in for the weekend

What did the supermarket do with this knowledge?

• They put the premium beer display next to the diapers
• The result was that the fathers buying diapers and who also usually bought beer now bought the premium beer (the up-sell) as it was so conveniently placed next to the diapers
• Significantly, the men that did not buy beer before began to purchase it because it was so visible and handy - just next to the nappies (the cross-sell)
• Beer sales skyrocketed