With thousands of products spread across multiple channels, retailers struggle to keep everything organised while understanding what sells, what doesn’t, and what customers actually want.
So, without a clear structure, inventory management becomes chaotic, leading to lost sales and excess stock.
Here’s where merchandise hierarchy comes into the picture – a strategic framework that enables you to organise, analyse, and manage the product assortment efficiently.
This article explores the concept of merchandise hierarchy, its levels, importance, and the critical factors to consider when establishing an effective structure.
What is merchandise hierarchy?
Merchandise hierarchy is a systematic organisational structure that categorises products into logical groups based on shared characteristics.
You can think of merchandise hierarchy as your retail family tree. It’s basically a way to organise products into logical groups that share common traits.
Instead of dealing with a massive jumble of individual products, retailers can view their inventory in layers – from broad categories down to specific items.
At its core, merchandise hierarchy helps you to:
- Keep products organised in a way that makes sense
- Track how different product groups are selling
- Get the right products to the right stores
- Set smart pricing for specific product groups
- Plan what to stock and manage product lifecycles
- Generate reports that actually tell you something useful
To give you a practical example, if you run a clothing store, you could organise by department (men’s, women’s, kids’), then by category (tops, bottoms, outerwear), then subcategory (shirts, t-shirts, sweaters), all the way down to specific items with unique SKUs detailing size, colour, and style.
By laying down a proper structure you can create a common language across your whole business.
Levels in merchandise hierarchy
A typical merchandise hierarchy has several levels, each getting more specific as you go down.
While every retailer might tweak the structure to fit their needs, most follow a pattern similar to this:
1. Department
At the top level, departments represent the broadest division of merchandise, typically aligned with how customers shop and how stores are physically organised. Examples include Fashion, Electronics, Home Goods, and Grocery.
2. Category
Categories break down departments into logical product groups. For instance, within the fashion department, categories might include Men’s wear, women’s wear, children’s wear, and accessories.
3. Subcategory
Subcategories further segment categories into more specific product types. Within Women’s Wear, subcategories might include dresses, tops, bottoms, outerwear, and activewear.
4. Class
Classes divide subcategories into even more specific groupings. For example, within the Tops subcategory, classes include T-shirts, sweaters, and tank tops.
5. Subclass
Subclasses represent the most detailed grouping level before individual SKUs. Within the T-shirt class, subclasses might be organised by sleeve length, fabric type, or style.
6. Style/SKU
At the most granular level are individual SKUs, each representing a unique product with specific attributes like size, colour, and material. For example, a specific blue, medium-sized, cotton jogger would have its own unique SKU.
Some retailers might add additional layers or use different terminology (such as “division” before department or “family” instead of class), but the fundamental principle remains the same: organising and narrowing down products from broad to specific classifications.
Factors in determining merchandise hierarchy
Creating an effective merchandise hierarchy requires multiple facets you should consider.
Here are the key factors you need to have in your checklist:
1. Demand forecasting
Modern consumers expect retailers to tailor their assortments to local preferences, making localisation capabilities a critical factor in hierarchy design.
So, demand forecasting becomes a critical component that acts as a foundation for developing a merchandise hierarchy that actually works.
External data (local demographics, household income, local customer preference, & more) when paired with existing store data helps you uncover many aspects including customer buying patterns, peak sales periods, customer behaviour, etc. This in turn helps you predict demand for products at store and product SKU levels across the country.
By forecasting demand accurately on a store and product SKU level, you can ensure that the right products are available at the right time and place.
By leveraging our solution you can:
- Anticipate demand fluctuations and avoid stockouts or excess inventory.
- Allocate inventory more efficiently across different locations.
- Optimise pricing strategies based on projected demand trends.
- Improve supplier coordination to prevent delays or shortages.
| Fact byte: Merchandise mix recommended by GeoIQ’s solution saw 45% more sales!
2. Customer shopping patterns
The best merchandise hierarchies should mirror how customers actually shop and think about products in your particular retail sector.
So, understanding how customers naturally group products in their minds requires careful observation of shopping behaviour and analysis of search patterns both online and in-store.
Customer interviews and focus groups can provide valuable insights into the mental models shoppers use when looking for specific items in your product range.
3. Business strategy and goals
Your merchandise hierarchy must align perfectly with your overall business strategy to drive the outcomes you’re trying to achieve.
If you’re pursuing category dominance in specific areas, your hierarchy might need more detailed levels in those strategic categories to enable finer control and analysis.
Retailers focused on localisation need hierarchies that easily accommodate local assortment variations without becoming unwieldy or inconsistent.
Understanding local demographics and buying patterns using external data becomes a crucial tool here!
4. Omnichannel considerations
With shopping happening across multiple channels simultaneously, your merchandise hierarchy must work consistently in all customer touchpoints to provide a seamless experience.
Your hierarchy needs to accommodate channel-specific assortments when necessary while maintaining the overall brand and goal.
5. System limitations and capabilities
Practical considerations regarding your technology ecosystem significantly impact what’s possible & what’s not with your hierarchy design and implementation.
Understand your existing ecosystem and whether the new hierarchy won’t face any technical constraints. Otherwise, it could lead to integration issues and inaccurate data mapping.
6. Future-proofing
Retail grows constantly, requiring hierarchies that can adapt to changing business needs without complete restructuring.
Building flexibility into your hierarchy design now means planning for potential new product categories, business lines, markets, or channels you might add in the future.
Take this into account while planning your merchandise hierarchy to make it flexible. The changes could be such as potential new product categories, business lines, markets, or channels you might add in the future.
Impact of a proper merchandise hierarchy planning
1. Better decision making
A solid hierarchy gives you insights at different levels, so you can quickly see which categories are killing it and which need help. No more guessing as to which products deserve your attention.
2. Smarter inventory management
When products are organised logically with data, you can set the right inventory levels for each product at the store and SKU levels. This ultimately means fewer empty shelves and less overstock gathering dust (and tying up your cash).
3. Streamlined operations
A well-designed hierarchy makes everything run smoother – from purchasing and allocation to replenishment and markdowns.
4. Better assortment planning
By analysing performance at different hierarchy levels, you can make smarter choices about what to stock, ensuring you have what your customers actually want to buy.
5. Improved customer satisfaction
When your merchandise hierarchy aligns with how customers think about products, shopping becomes more intuitive and personal. This means higher conversion rates and happier shoppers.
Conclusion
A well-developed merchandise hierarchy is the foundation that successful retail is built on.
To make smarter decisions, respond faster to market changes, and deliver more relevant products to your customers, utilise our data solutions that optimise the hierarchy and guarantee sell-through!