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

Implementing market basket analysis

This type of analysis is certainly not the exclusive domain of the supermarkets.

Information required:

• Customer identification e.g. loyalty card identifier and or name and address
• Purchase transactions e.g. what was purchased, by who, when and the value
• Product identification e.g. type or category of product

Data preparation:

• For each customer, compare all items in a basket with all other items in the same basket e.g. fields: customer id, product A, product B
• Exclude: Multiple customer purchases and non-products e.g. delivery charges
• Count the number of times each combination exists for the period under consideration e.g. 18 months e.g. fields: product A, product B, volume of purchases

Starting the analysis:

• Sort the results to reveal the highest volume of purchase combinations
• Now identify for each high volume combination the number of customers that bought only one of the products
• Compare these two result sets to establish where there is a strong propensity to purchase a specific product combination and there is a demonstrable market for its promotion to other customers i.e. customers who purchased one product but not the other (see diagram above)

The market basket analysis results might look like this:

This analysis can be enhanced by combining other customer elements e.g. demographics, purchase channel preference, business sector.

Perhaps there is a need to differentiate between male and female purchasers. When preparing the data, link in the associated customer records and add gender to the results e.g. fields: product A, product B, volume of purchases and gender.

What are the challenges with Market basket Analysis?

You could use the above as the basis for identification of latent cross-sale opportunities.

But there are a few challenges to be overcome in order to be really successful:

• What type of customer is making the purchase?
• Should you limit cross-selling to a category of product?
• If business to business sales, are all products relevant?
• Do businesses in different sectors buy similar or different types of products?
• Consider timing of purchases, should analyse single baskets or group purchases?

All of these can be overcome by integrating other forms of customers analysis and profiling.

Gaining value from Market Basket Analysis

Many of Information  Drivers clients are interested in what their customers have purchased and in what combination. They use this information to direct on-line and off-line propositions.

Would you like to understand your customer purchasing habits? Could market basket analysis be applied to your business and or website? A website implementation is an ideal candidate. Just like Amazon, you could use your website data to drive propositions, advert and product placement.

Would some guidance with implementing market basket analysis be useful? If that's a 'Yes', get in touch to arrange an informal discussion contact our Customer Analytics Director: david.willis@information-drivers.com or call David Willis directly on: 01494 871342.

Not ready yet? Perhaps you would you be interested in the results? Please view the results of our Business Opportunity Assessment.