You worked long and hard on your sales plans. You crunched the numbers from last season. You projected into the future. You identified what inventory needed to be in stock. You nailed down the when and where of your supply chain. It all seemed so beautifully planned.
But here it is:
Your 10th, 20th—maybe even 30th customer complaint: That the one thing they want is out of stock.
Is effective inventory management—having exactly the right products you need in stock at exactly the right times, regardless of the season or trend, and therefore creating a rock-solid merchandise plan—an impossible task?
It doesn’t have to be.
What is merchandise planning?
Merchandise planning is a systematic approach to planning, buying, and selling merchandise based upon consumer demand. The goal is that if a customer wants to buy product X with color Y and size Z from your shop, you have that available when they come knocking.
Elements of the merchandise planning process
Changes in the retail industry have complicated the merchandise landscape. Global sources, tougher competition, and more product variety are just a few of the challenges retailers face. There is one framework that merchandise planners follow to focus on the right things, and it consists of the following elements:
1. Data analysis
Data analysis involves collecting information from past sales, customer behavior, and market trends,hen looking for trends within that data, such as which products sell best during certain sessions. Using these insights, retailers can make educated guesses about what might happen next.
Will a particular style of shoe be popular next summer? Should we stock more umbrellas for the rainy season? Data analysis helps answer these questions, guiding inventory decisions and reducing the risk of overstocking or running out of popular items.
Bedding company Rest leveraged Shopify Plus's data analytics capabilities to overcome challenges in a competitive market. Using Shopify Analytics, they gained clarity on key metrics like store visits, return customers, and average order values across multiple markets.
This data-driven approach allowed Rest to optimize local sales strategies, streamline operations, and customize checkout processes. As a result, they saw a 10% increase in average order value, 30% reduction in operational complexity, and 20% decrease in staffing needs for multi-site management.
👉 Learn how Rest surpassed $30M in annual sales within 2 years on Shopify
2. Objective setting
Another element of merchandise planning is setting objectives. Retailers set clear, quantifiable goals that align with their business strategy and influence product decisions.
These objectives usually encompass:
- Revenue targets
- Gross margin
- Inventory turnover rates
- Customer acquisition and retention metrics
Setting clear objectives ensures that your merchandise planning efforts are focused, measurable, and directly contributing to the company's overarching goals.
3. Assortment planning
Assortment planning is how you decide which products to stock and sell. It includes choosing the specific items, sizes, colors, and categories you’ll sell at a given time.
In the months leading up to Christmas, for example, retailers think carefully about their product mix. They know gift-related items usually sell well during this season, so they plan to have more products that make good gifts in their inventory as the holiday approaches.
4. Space planning
Space planning determines how you display and store products. It helps you make the most of the space you have and creates a logical flow for shoppers as they browse, whether online or in-store.
To accomplish this, planners consider things like:
- Which products sell the best and should get prime spots
- How to group similar items together
- Making sure there's enough room for popular items
- Balancing the space given to different product types
Good space planning increases sales by making it easy for customers to find what they want. It also helps keep inventory organized and simplifies restocking.
5. Inventory management
Managing inventory well means having enough merchandise to meet customer demand, but not so much that money is tied up in unsold goods. In the age of unified commerce, it involves ensuring there are accurate stock levels on all sales platforms, like your website, marketplaces, and retail stores.
For example, Allbirds used Shopify POS to manage inventory across its global stores, from the US to London and Tokyo. It’s "endless aisle" approach allowed stores to sell products not physically in stock by shipping directly to customers.
This strategy improved conversion rates, optimized inventory allocation, and provided valuable data on customer demand. It enabled Allbirds to maintain smaller store footprints while still meeting diverse customer needs across international markets.
6. Pricing strategy
Pricing must support overall merchandise plans and maintain profitability across a large and diverse product assortment. It involves determining the starting price for new products based on costs, market positioning, and expected demand and then planning when and how to change prices throughout a product's life cycle.
One of the key challenges in omnichannel pricing is maintaining consistency. Retailers strive to keep prices similar across channels to avoid confusing or frustrating customers. However, this isn't always easily accomplished due to varying costs associated with each channel. For instance, online sales might incur shipping expenses, while physical stores have rent and staffing costs to consider.
7. In-season management
In-season management means monitoring the performance of a product while it’s actively being sold. If an item sells fast, managers might order more to keep it in stock. If something isn't selling well, they might put it on sale or move it to a different spot in the store.
In-season management also means watching for trends and reacting to them. For example, if a certain style or color suddenly becomes popular, planners might rush to acquire more of it. The goal is to have the right products available at the right time, and in the right amounts.
How to develop a merchandise plan
The basic merchandise planning process consists of three equally important steps:
- Post-season analysis
- Pre-season planning
- In-season adjusting
You can define a season as any time period that you prefer—it largely depends on what you’re selling. If it’s Christmas sweaters, your season is only a couple of months, whereas for ice cream, it’s year round (although demand will be higher during the warmer months).
When you’re selling products with wildly different seasons, it makes sense to have separate, more detailed plans for all of the product categories in which you’re active.
Other factors that affect the process include the size and structure of your retail business, type of store—outlet, online, omnichannel, etc.—and type of merchandise. Planning merchandise for a menswear company that has multiple retail locations around the country is vastly different than the same process for a company that is selling tea online.
If you’re selling tea, your work involves deciding what types of tea you want to sell and then stocking up on them. With menswear, you have the added fun of forecasting how many suit trousers with length X and waist Y you’re going to sell and at what time of year, and then going through the same process with every item in your whole collection.
Fortunately, while the amount of work that goes into merchandise planning varies tremendously depending on your industry, the basic concepts of how to conduct merchandise planning stay the same.
Step 1: Analyze post-season merchandise
The first step is to understand your performance during the previous sales season. Again, it’s up to you to define how long or short a season is.
What’s important here is to really dive into the data, looking at not only the total number of sales, but going deeper into monthly results—or even weekly results—on an item, category, department, and store basis.
Next, you should compare those figures to the numbers planned for the same period to gain an understanding of how your actual results measure up. Essentially, what you’re doing is a gap analysis on sales.
It’s important to have the same data available going back multiple sales seasons, as this will give you a better overview of where things are going, which is crucial for planning into the future.
When looking at your past and current sales data, take context into account. If sales haven’t grown recently, it could very well be because of changes you made.—for example, maybe you have closed underperforming retail shops, or opened new ones.
When you’re trying to make sense of the numbers, it’s never advisable to look only at raw data without any context. Your business doesn’t live in a vacuum—everything is connected and plays a role. This includes outside forces like the economy, as well as inside forces like marketing.
What you’ll end up with is an analysis of not only the numbers but also the context behind those numbers. This will make assortment planning for the future a whole lot easier.
Step 2: Plan pre-season merchandise
This is where the fun begins! Using data from your previous analysis, it’s time to plan the season ahead.
It’s crucial to involve your sales, marketing, and even visual merchandising teams from the very beginning. Without their input, you’ll miss out on context. For example, you could be looking at historical data that shows steady but not exponential growth for a particular product. Without further information, you might add that multiple and be done with it.
What you might not know is that marketing saw those same numbers, looked at the margins from previous years, and is planning to invest three times the spend this time around.
Good for sales. Not good for keeping up with inventory.
Another thing to keep an eye on during this phase is the impact that opening new sales channels can have on your business, most notably:
- Wholesale
- Social selling
With new channels, it’s always hard to plan ahead, as you have no actual sales data to back up your assumptions. In a situation like that, it pays to look at channel-specific industry sales data and use that for your projections.
Even when taking all of the above into consideration, there inevitably will be situations in which you find yourself with either too much or too little stock. Smart business owners plan for every eventuality, so they have backup plans for everything—and you should too.
When they run into overstock issues, smart businesses have plans for getting rid of it. That can mean creating a special newsletter with bargain prices for things that are not selling, holding a flash sale, or using secondary markets like eBays.
The specific tactics are up to you—the idea is to have a plan for when those situations arise so you’ll know exactly what to do. When the problem is that you have more orders than you have stock, for example, companies that dropship can be your savior.
Step 3: Adjust in-season merchandise
Big-box stores like Target and others have realized that the old way of managing supply is dead, and there are smarter ways powered by new technology.
The technology is called “open to buy,” or OTB for short.
OTB is a financial planning tool designed to make it easier for businesses to manage inventory. It helps avoid both overbuying and underbuying by making sure the product is always in steady supply.
An OTB system looks at your current inventory plus your planned sales, and compares that data with data from your actual sales. The system then makes automatic adjustments to your future purchase orders to make sure you never run out, or overstock on items of which you already have plenty.
Many inventory management systems have OTB either built in or available as an add-on. As there are so many different systems, it’s hard to provide links or more concrete information on all of them. Your best bet is to talk with your system provider directly.
Shopify Plus’s APIs make it fairly easy to integrate many OTB systems. There also are many good ready-to-run OTB apps, such as Inventory Planner Forecasting. You can get reliable, real-time data with these apps and automate replenishment decisions easily.
Why is merchandise financial planning important?
With merchandise planning, you can anticipate changes in market demand and adjust product availability accordingly, ensuring the right merchandise is available in the right quantities at the right time.
It’s also important in helping retailers to:
- Maintain profits. Data-driven, accurate forecasts help retailers buy merchandise at ideal cost points, so they can better manage costs and reduce markdowns. Planners also collaborate with other partners to develop sales, margin, and OTB plans that drive growth and improve bottom line.
- Respond to changes in customer demand. By monitoring trends and balancing store assortment, you can proactively reallocate resources as needed for maximum return.
- Monitor product line performance. Retail merchandise planning gives you insight into customer preferences and marketing effectiveness. You can easily identify underperformers and determine how to optimize product lines for maximum sales.
Overall, merchandise planning helps ensure profit and inventory objectives are being met, whether you’re launching new products or getting rid of old stock. It ensures a healthy amount of inventory, and manages inventory flow to maximize growth and minimize risk.
Effective merchandise planning is critical to successful supply chain management for any size retailer.
Build a centralized inventory management system to satisfy customer demand
Merchandise planning is a crucial step for any retailer, in-store or online. It enables you to take the maximum possible revenue from your inventory, while at the same time balancing stock levels.
It might seem like a complicated process but, in reality, it’s not. It consists of three easy steps:
- Analyze past results
- Plan for the coming season
- Adjust as needed (OTB)
By following these steps, you’ll be well on your way to managing your inventory levels with ease.
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Merchandise planning FAQ
What is the merchandise planning process?
A merchandise planning process analyzes consumer demand and develops strategies to maximize your company's sales and profits. It involves analyzing past sales and trends, forecasting consumer behavior, and setting pricing and promotions strategically.
What does a merchandise planner do?
Merchandise planners develop strategies to maximize sales and profits. They pick and price items based on data and trends, ensuring the store's overall financial goals are met. Planners may also use a planogram to visualize SKUs in your retail store and improve visual appeal.
What are the components of merchandise planning?
Merchandise planning is a systematic process that involves several components, including analyzing customer needs and preferences, forecasting demand, creating a merchandise, pricing products, and monitoring and controlling inventory.
What are the 5 Ps of merchandising?
The 5 Ps of retail merchandising include:
- Price. The pricing strategy of your products and how it affects the customer experience.
- Product. Every feature and benefit customers experience from using your product.
- Promotion. The campaigns you run to build awareness, including ads, social media, email promos and other marketing tactics.
- Place. Where people see your products.
- People. The staff that work for your ecommerce business, including you.
