Market Basket Analysis
Market Basket Analysis is one of the most common and useful types of data analysis for marketing and retailing. The purpose of market basket analysis is to determine what products customers purchase together. It takes its name from the idea of customers throwing all their purchases into a shopping cart (a “market basket”) during grocery shopping. Knowing what products people purchase as a group can be very helpful to a retailer or to any other company. A store could use this information to place products frequently sold together into the same area, while a catalog or World Wide Web merchant could use it to determine the layout of their catalog and order form. Direct marketers could use the basket analysis results to determine what new products to offer their prior customers.
In some cases, the fact that items sell together is obvious every fast-food restaurant asks their customers “Would you like fries with that?” whenever they go through a drive-through window. However, sometimes the fact that certain items would sell well together is far from obvious. A well-known example is that a supermarket performing a basket analysis discovered that diapers and beer sell well together on Thursdays. Though the result does make sense – young couples stocking up on supplies for themselves and for their children before the weekend starts – it’s not the sort of thing that someone would normally think of right away. The strength of market basket analysis is that by using computer data mining tools, it’s not necessary for a person to think of what products consumers would logically buy together – instead, the customers’ sales data is allowed to speak for itself. This is a good example of data-driven marketing.
Once it is known that customers who buy one product are likely to buy another, it is possible for the company to market the products together, or to make the purchasers of one product the target prospects for another. If customers who purchase diapers are already likely to purchase beer, they’ll be even more likely to if there happens to be a beer display just outside the diaper aisle. Likewise, if it’s known that customers who buy a sweater and casual pants from a certain mail-order catalog have a propensity toward buying a jacket from the same catalog, sales of jackets can be increased by having the telephone representatives describe and offer the jacket to anyone who calls in to order the sweater and pants. Still better, the catalogue company can provide an additional 5% discount on a package containing the sweater, pants, and jacket simultaneously and promote well the complete package. The dollar amount of sales is guaranteed to go up. By targeting customers who are already known to be likely buyers, the effectiveness of marketing is significantly increased – regardless of if the marketing takes the form of in-store displays, catalog layout design, or direct offers to customers. This is the purpose of market basket analysis – to improve the effectiveness of marketing and sales tactics using customer data already available to the company.