Switching is NOT Substitution
In the world of Consumer Goods, one of the key analytic frameworks for understanding product choice is the decision tree or market structure. The key purpose of the market structure is to reveal the levels or degrees of product loyalty. Where are shoppers most willing to accept substitutes for their preferred product (transferable demand) and where are they least willing (walk rate)?
As such, the market structure is incredibly useful for retailers and their category advisors to curate an assortment of products that meet the diverse needs of their shoppers. Without a credible market structure, retailers may overemphasize sales or sales velocity to the detriment of category incrementality. For example, vanilla is the most popular flavor of ice cream, but a retailer would be ill-advised to carry every brand and size of vanilla before adding chocolate, strawberry, or cookies & cream to the mix. Similarly, cheap wine may have the highest unit turns, but a wine set devoid of premium wines will underperform as shoppers who desire quality will choose to shop elsewhere.
Most retailers and manufacturers understand this concept; however, many are unwittingly using analyses and tools that underdeliver on the key objective.
Let’s take the world of vinegar by way of a personal example. We have a lot of vinegar in our home. My wife and I buy balsamic vinegar to dress our salads and add flavor to a variety of dishes such as sauteed mushrooms and roasted vegetables. Sometimes I want more of a kick and choose red wine or sherry vinegar. Rice wine vinegar flavors many of our Asian dishes, marinades, and poke bowls. My wife uses apple cider vinegar when making German potato salad, my daughter uses the same product as a natural hair conditioner, and I occasionally take a shot for purported health benefits. We keep a big jug of cheap white vinegar under the kitchen sink to do household cleaning tasks and in the garage as a natural weed killer.
Our household switches among all these types of vinegar, but they are clearly not substitutable. I wouldn’t use balsamic vinegar to kill weeds on the patio and my daughter won’t use it to rinse her hair. The jug of white vinegar isn’t going anywhere near our salad. The point is clear: switching is not the same as substitution.
This phenomenon isn’t unique to vinegar—it’s endemic to all categories whether that’s alcoholic beverages, cheese, or lotion. People in a household have different needs, and these needs vary based on the occasion or purpose or primary benefit sought. People buy different alcoholic beverages depending on whether they’re drinking by themselves, sharing with someone special, going to a party, entertaining, or gifting. We shop for a purpose and put varying weight on qualities such as convenience, value, health, or indulgence; our motivations may include bonding, social acceptance, rewarding, self-expression, etc.
I typically describe these underlying purchase motivations as “category need-states.” I certainly did not invent the term. Some call them “occasions” and others prefer “jobs to be done” from Clayton Christensen’s, The Innovator’s Solution (2003). One important aspect to understand is that they are not static: people move through different need-states throughout the day and throughout their lives.
Let’s get back to the main point. Manufacturers and retailers widely accept the concept and purpose of market structure and decision trees; however, all too often their framework is flawed because they are missing the category need-state from the underlying methodology.
Fact: you cannot ascertain a need-state from a bar code or a scanner.
Fact: need-states are experienced by individuals not households.
Fact: longitudinal purchasing patterns reveal switching not substitution.
Fact: loyalty card data misses what happens outside those stores.
I have great respect for the emerging fields of artificial intelligence and machine-based learning but count me skeptical that they are going to reveal product substitutability from transactional data alone. In most categories, the potential number of assortment options at a retailer exceeds the number of atoms in the universe.
Our team at Vista Grande has developed a new approach to market structure, called Category Choice Architecture®, that reveals product substitutability based on category need-states. We’ve completed studies in over 25 categories across a wide range of channels and retailers, brick & mortar and e-commerce. Our underlying method involves a proprietary shopping simulation with a direct substitution exercise specific to a need-state.