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How to Group Products for Data Driven Marketing

Many companies sell a large number of different products using data driven marketing. In the case of consumer goods retailers, they sell many different brands of each product. Grocery stores, department stores, and retail stores in general have thousands or even tens of thousands of distinct products in inventory at any given time. And these inventories change all the time.

Though not as extreme, this product diversity exists in other industries as well. Banks and other financial institutions have a fairly significant range of products. Six-month, one-year, and five-year CDs are all different products with different yields. Automobiles differ not only by make and model, but by color and optional accessories as well.

Making sense of product diversity requires you to simplify your view of the product world. Think product types. Most companies have different levels of summarization for their products, called product hierarchies. These hierarchies resemble the classification system in biology — order, family, genus, species, and so on. Using such classifications you can generate a picture of your customer’s product needs that’s manageable and actionable.

Banking products fall into a fairly natural hierarchy. At the highest level, banks offer deposit products and loan products. At the next level, a distinction is made between demand deposits like checking accounts and time deposits like CDs, which have a maturity date. On the loan side, installment loans that have a defined payment schedule are distinguished from revolving lines of credit such as credit cards.

At still another level down, products are grouped by product type. Checking accounts, savings accounts, CDs, IRAs, mutual funds, and so on. At this level, there are somewhere around 15 or 20 product types. That’s still a manageable number of buckets. There’s enough detail to get a pretty good picture of the customer relationship.

Grocery stores have a similar set of product types. When you wander through, you pass the produce department, the meat counter, the bakery, and so on. These departments form the basis for a useful product grouping. Again, there are a relatively small number of product types based on these departments.

When summarizing your products into groups at the customer level, you need to balance simplicity and completeness. You want to have a manageable number of buckets, but you also want to capture the full breadth of your business.

There is no hard and fast rule for the right number of groups other than you’ll know it when you see it. But typically if you get much over 20, you’ll be sacrificing the simplicity you were after.

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