Retail Dogma

Merchandise Hierarchy: How to Set it Right?

Merchandise hierarchy or product hierarchy is a way of organizing your product portfolio into different sub levels that will make it easier for you to monitor and analyze your inventory in the future.

Instead of reading a report about the sales of your men’s department in general, you’d rather have a report that shows you what exactly in mens’ department is selling and what is not selling.

However; you won’t reap the benefits of setting such a system unless you set it right from the start, so here we will cover certain things to take into consideration while setting a product hierarchy for a retail or e-commerce business.

Levels of Merchandise Hierarchy

Merchandise Hierarchy

The number of levels or the nomenclature of the different levels differs form business to business, but typically the number of product hierarchy levels are 5 or 6 levels. The depth will depend mainly on the size of the business and its assortment strategy.

Read Also: Depth vs. Breadth: Product Assortment Strategy

For example, If you have a big department store that sells a wide range of product types, you can start at Division level, other wise your can skip that level and start at the next one. If you are fashion store for example, there is no need to put fashion as a level, since this includes all your products, you can start at apparel directly.

Sample of a Merchandise Hierarchy

  • Division: Could include fashion, Home Furnishing, Appliances,.. etc
  • Group: Under fashion this could include: Apparel, accessories, ..etc
  • Department: Under apparel this could include: Men’s wear, women’s wear, kids,..etc.
  • Class: Under men’s wear this could include: t-shirts, pants, jackets,.. etc.
  • Subclass: Under t-shirts this could include: short sleeve, long sleeve, sleeveless,… etc.

Things to Consider

1. Once & For All

Setting your product hierarchy is a task that you should be doing at the very beginning of starting your business and you should put in mind that this task is made to last forever.

In order to get the best out of such system, you should set it in a way that doesn’t require future changes or frequent adjustment. This would mean that, while setting your levels, take into consideration all the product varieties that you are expecting to launch and how you can group them together under common categories that will represent a wide, yet specific enough sub level.

2. Longevity

You also don’t want to create special sub level for products that are not long lasting. For example you don’t want to create a separate class or subclass for a product that is a temporary fad and you are not expecting to carry it in the future. In this case it’s better to try and incorporate it under another one that will be more inclusive and lasting.

3. Product Hierarchy vs Product Attribute

You should also know the difference between hierarchy levels and product attributes and not mix them together.

For example color is an attribute, as you can have a blue t-shirt or pant or toy. So color should never be in the hierarchy, but rather assigned as an attribute to products where color difference is relevant.

4. Actually Use It

The only way for such a system to be beneficial is that you actually start to use it in your reports and analysis. You can use merchandise hierarchy levels when you are analyzing your sales reports, when you are reading your sell through report and for sure while you are planning your next buying.

Just like you need to know the sales by category contribution, you also want to know what exactly under the kids category is driving my sales? Which classes/ subclasses are preferred by my customers… and so on. This will allow you to make better buying decisions and also better inventory management decision, since you don’t need to discount all the products under a certain sub level, but only the ones that are not selling.

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