Behavioral merchandising is the art and science of using customer behavior to place, promote and display products in order to maximize retail sales revenue. In an online retail context, examples includes using data on where visitors come from, what they search for, what they click on and what they buy, to drive as relevant product promotions to each visitor at every point of interaction as possible.

Example applications include features such as "people who, like you, came here from... twice official merch searching for... usually ended up buying... " and "customers who bought this item also bought... ".

Behavioral merchandising was originally made famous by Amazon. com, but has evolved much further. Today, it is practiced at online retailers everywhere on the globe - companies whose turnover can be anything from $1 million to $1 billion and beyond.

The popularity of behavioral merchandising stems from the fact that it has been proven to be up to 300% more effective than customer segmentation in impacting sales per visitor through raising conversion rates and average order values.

Behavioral merchandising offers a personalized shopping experience for visitors that is highly relevant, trustworthy, and that adapts to changing customer preferences automatically. The automation aspect also means it offers retailers an opportunity to cut costs of manual merchandising, while at the same time achieving better results.

What is merchandising?

"Merchandising means maximizing merchandise sales using product selection, product design, product packaging, product pricing, and product display that stimulates consumers to spend more. This includes disciplines in pricing and discounting, physical presentation of products and displays, and the decisions about which products should be presented to which customers at what time. "

An Established Practice

To explain behavioral merchandising it is beneficial to first look at its roots.

Merchandising is a relatively old practice used by retail stores to increase sales. Some well-known examples of traditional merchandising include placing and promoting - Candy by the check-outs - Children's yogurt at the eye level of children - Milk at the back of the store

Predictably, merchandising has migrated into electronic sales and is today a natural part of every major e-commerce site. As in the traditional sense, electronic merchandising is about maximizing the conversion rate and the average order value through displaying the right products in the right way to the right individuals.

Why Merchandising Matters

We have established that retail merchandising is the art of increasing sales, in other words maximizing sales revenue from a given audience of visitors to a retail outlet. To understand the importance of merchandising, we must also put it in relation to advertising, which is basically the art and process of driving an audience of visitors to the outlet in the first place.

A retail outlet will typically want to spend a given amount of money on advertising to drive as much relevant traffic as possible to the outlet - maximizing the performance metric cost-per-visitor or cost-per-click as it is often referred to.

The retail outlet will then want to practice the best possible merchandising in order to convert this traffic into as many buying customers as possible - maximizing the performance metric conversion rate. To generate as much value out of the traffic generated the retail outlet want to make each visitor to buy as much as possible - maximizing the performance metric average order value.

In short, the success of the retailer's efforts in maximizing cost-per-visitor, conversion rate and average order value will more or less define the sales revenue generated by the outlet. Adding the cost-of-goods-sold margin or average product margin completes the model to define the operating profit that the outlet will generate.

It becomes clear that there are basically four levers that the manager of a retail outlet can pull to try to maximize profits. Unfortunately not all the four levers are under the retailer's control.

The ultimate aim of advertising, merchandising and purchasing combined is to maximize the operating profit of the retailer. Four key performance metrics that define the success of this process - Cost Per Click, Conversion Rate, Average Order Value, and Cost of Goods Sold margin. But only the Conversion Rate and Average Order Value metrics, which together quantify the success of the merchandising process, are directly under the retailer's control. ' In an online environment much of the traffic is purchased along a CPC-model. CPC is the cost-per click or cost-per-visitor paid to a media company for each visitor driven to the e-commerce site. The CPC-prices are relatively perfectly priced through supply and demand. The retailer must simply pay what the market demands for advertising.