What Is Category Planning in Retail? Process and Technology

A profitable retail store hinges on more than just having the right products on the shelves. It’s about strategically choosing the right products to stock, how you’ll display them in-store, and how much shelving space you’ll allocate to each product category.

Category planning is the broad retail term that covers all of these tasks and more. The goal is to curate product categories that not only convince people to buy through improving the customer experience, but also maximizing profitability and sales per square foot. 

This guide shares the category planning strategies for retailers, with examples and obstacles you’ll need to overcome when building profitable categories. 

What is category planning?

Category planning describes the strategic process behind managing product categories for a retail store. It includes deciding which categories to create, sourcing products to stock within one, how much each unit should sell for, and how the category will be displayed on the shop floor. 

An apparel retailer, for example, might use category planning to sell hats and jewelry but not sneakers. The retailer's decisions are based on data related to profit margins, customer demand, ease of sale, and seasonal trends. 

Category planning is an important aspect of retail operations because it leads to:

• Increased sales: Category planning creates opportunities to upsell and cross-sell customers. If someone is visiting your store to browse children’s coats, for example, display other higher priced or complementary products beside the collection to increase average basket size.
• Improved customer experiences: Well-planned product categories help customers find the items they’re looking for in-store. If they visit looking for an iPhone phone case, they know to head to the “Apple” section to find it. 
• Better inventory management: The category management process lets you identify best-selling categories so you can stock more items within it, reducing the risk of a stockout that turns customers away. The same is true for worst-performing categories: you’ll know not to stock more of these products and tie up cash in inventory that’s harder to sell. 
• Cost savings: A category plan helps you save money by expanding product lines that your customers are interested in and improving profit margins. Oftentimes, strategic sourcing means consulting your existing vendors and asking for bulk discounts when buying more products to expand a product collection. 

The category planning process

1. Assess and analyze data

Data is the best way to make sure that your proposed categories will actually result in revenue for your retail business. Before committing to any new collections, use the following data sources to conduct a category review and understand what customers want.

• Use market data: Mass market research can point you toward emerging product categories or consumer preferences. If you’re selling to golfers, for example, consider this research study that surveyed golfing fanatics to find out why they participate in the sport. 
• Competitor analysis: What categories do competing retailers stock within their stores, and how big are those collections? Most stores will have already done the category planning research you can piggyback on during your process. 
• Customer feedback: Get your retail employees into the habit of asking customers questions like, “Is there anything you were looking for but couldn’t find in-store today?” The categories mentioned the most should be considered when building out new collections. 
• Profit margins: Measure the total income generated from each product and category and the profit margins for either. One collection might generate $15,000 in monthly sales, but if the profit margin is the lowest out of all categories, it’s likely not worth prioritizing (unless you can bring down the cost of goods sold).
• Sell-through rate: This metric shows the percentage of inventory that’s sold during a reporting period. It can highlight trends in customer demand: Products with a sell-through rate on an upward trajectory are becoming more popular. 

Combine this data with supplier capabilities. It’s all well and good to have a category filled with products that fly off the shelves. But if you don’t have a consistent supplier to deliver items at the right price within a reasonable time frame, is it worth stocking in your retail store? If the category is incredibly valuable and you struggle to source a consistent supply, prioritize finding new manufacturers. 

📌Pro tip: Shopify collates sales data from customers already interacting with your business, whether that’s in-store through your POS system or online through an ecommerce site. Use these omnichannel inventory reports to make smarter product category decisions. 

2. Define and structure the category

Compare the data you’ve collected against the product categories already in play within your retail store. You should prioritize new collections with the greatest revenue potential.

Depending on the category size, you might need to break it down into mini-segments. Kit + Ace, for example, has an overarching category for “Women’s clothing” and multiple subcategories that sit within it:

Bear in mind that not all new categories need to be new and built from scratch. A retailer already selling home office supplies but just wants to add pencil cases, for example, could add a new category that sits beneath the existing “Stationery” collection. It doesn’t need to be a standalone collection—just an expansion of an existing one. 

Once you’ve got the category definition and hierarchy laid out, define how you’ll group the products in your inventory management system. Shopify lets you create automated collections based on predetermined conditions like:

• Product name
• Tags
• Vendor/manufacturer
• Price
• Product tag

This makes it easier to see inventory reports for a particular collection and also saves your retail team time when building orders on your point-of-sale system. On the touch screen, they can easily locate a customer’s product within a particular category.

3. Assign a category role

A category role describes the specific function or purpose of that particular collection. Generally speaking, we can break them into four categories:

• Destination categories: Products within this category drive customers into your store. They’re often best sellers or trending products, giving shoppers a clear reason to come in-store. 
• Routine categories: Categories with products that people buy regularly. Examples include cosmetics and toiletries. 
• Convenience categories: Products with a short sales cycle, often with minimal deliberation. Examples include everyday items like cleaning supplies, groceries, or candy.
• Seasonal categories: Sales for a particular product or collection can fluctuate throughout the year. The goal isn’t necessarily to achieve sales year-round—it’s to capitalize on peak shopping seasons by displaying seasonal inventory when shoppers are actually looking for it.

4. Determine performance criteria

Before rolling out your new collections, put some benchmarks in place to help you determine whether a category is successful. Popular key performance indicators (KPIs) in category planning include:

• Sales metrics: Set business targets, such as the number of units you want to sell or the total revenue target for the entire collection (e.g., $5,000 in new sales over the next month).
• Profitability: Effective product categories result in profit, so set a minimum profit margin you’d consider a success for the new category. Between 30% and 50% is typically ideal.
• Inventory metrics: Use retail metrics like sell-through rate or inventory turnover to evaluate how quickly products within the new collection sell. 
• Customer satisfaction: Lean on customer feedback, reviews, and surveys to measure how well you’re meeting customer expectations with the new category. For example, you might strive for positive feedback from 90% of customers who visit your store.

5. Develop a strategy

You’ve got a clear idea of the product category you want to introduce, the products within it, and how you’ll measure success. Next, outline a strategy for how you’ll launch the new collection—starting with how much you’ll sell it for. 

Will you introduce any special offer or discount to celebrate the launch? How does this tie into other product lines? A retailer introducing a new “Skincare” category could offer a free trial-sized version of mascara with any new skincare purchase, for example.

Similarly, think about where your new category will live—both on the shop floor and within inventory storage (i.e. your stockroom). You might want to position the new category alongside best sellers in your storefront display, or move the stockroom storage shelves closer to the internal door to your shop floor for easy picking.

6. Plan implementation and launch

Implementation describes how you’ll actually bring the new product category to your customers and launch it in-store. Think about visual merchandising tactics like:

• Window displays: Show the entire collection in the window to convince passersby to view your new products. If you’re launching a new category of glassware, for example, set up a dining table within your window display to show what the new products look like in their intended environment. 
• Product placement: Use planograms to plan where each individual product will sit on the new category shelving. It’s usually best to showcase best-selling products—perhaps the centerpiece or focal product you’ve built the new category around—at eye level. 
• In-store marketing: Whether it’s a demonstration or free sample station, get creative with how you’ll show new products in store. These interactive retail encounters give shoppers a hands-on way to experience new products before they commit to buying them.

It’s also wise to train your retail employees on how to sell products in the new category. This enables them to provide outstanding customer support and answer questions from customers interacting with the new category. 

7. Launch the new product category

You’ve done most of the heavy lifting by this point—what’s left is making sure customers get the experience you planned. Part of this means a consistent supply of the new products they’re loving. 

This is where strong supplier relationships come into play. When you’re on great terms with your vendors, you can alleviate any supply chain issues that could cause stockouts. Vendors might be more open to offering expedited shipping, bulk discounts, or significantly increasing quantities if you’re a valued buyer. 

Similarly, make sure you’ve got processes in place to manage receiving inventory. The last thing you want is for your stockroom to become an unorganized mess when you’re stuffing new products alongside existing inventory. Consider using RFID technology to easily locate new products in your stockroom without requiring a line of sight (like barcodes require). 

Common challenges found with retail category strategies

Category planning doesn’t come without its challenges. Here are four of the biggest issues to overcome, with solutions on how to do so:

• Demand forecasting: It’s difficult to know which products or categories will be popular in six month’s time. Lean on demand forecasting tools, which use data and technology to spot emerging trends, to futureproof your category assortment as much as possible. For example, Stocky by Shopify offers inventory forecasting features to help retailers make data-driven decisions about their product assortment.
• Seasonality: Sales for a particular product or collection can fluctuate throughout the year—as can the prices people expect to pay. Rely on historical data to identify these peak seasons and offer a mix of both seasonal and evergreen items to bring in revenue consistently year-round. 
• Breadth vs. depth: Do you stock multiple products within the same category, or spread further afield and offer variety with different collections? There’s no best practice—other than continuously measuring collection performance and gathering customer feedback. It often takes trial and error to find the right balance. 
• Cross-category cannibalization: Introducing new product collections can draw sales away from other top-performing categories, as opposed to bringing in new revenue. Customers might also get confused if they don’t know where to look for a particular product since it falls within multiple collections. Overcome this challenge by focusing on differentiation: What’s the distinct reason someone would buy a product from one category versus another? 

Start implementing category plans for your retail store

A category plan is a crucial part of retail management—one you’ll need to get right if you’re to operate a profitable business. It helps you locate the best items to stock within a category so that you can drive a steady stream of new customers (and sales!) in your store. 

Shopify POS has all the tools you’ll need to plan and manage retail categories. Smart inventory management features and sales reports unveil retail data you’ll use to decide; automated collections mean any new product is easy to locate on your POS interface.

“I can pull a report to see which items have the highest profit margins or that we’re selling fast, and then tell store staff to put them front and center,” says Corey Glasson, owner of Twinkle Twinkle Little One. “The time we’ve saved that would have otherwise been spent managing operational overhead is huge. That’s time we can invest into actually growing the business. With Shopify, we’re able to be proactive and build for the future.”