Trendify helps different organizations like #retail #ecommerce #game #insurance industry to segment products – SKUs and manage process.

Ex.With the segmentation algorithms that Trendify has worked on in the retail sector, it has contributed to its customers gaining in stock management with product-sku segmentation.

As Trendify, we have prepared this series of articles in order to guide the roles of data scientist/analyst/business analytic working in this field and to contribute to the profits of businesses by applying a correct segmentation method.

In this article series, especially we we will talk about product / SKU segmentation and importance for business.

This is the first article of our post series and its content about;

I. What is Product / SKU Segmentation ?

  • Segmentation
  • Product / SKU Segmentation
  • Importance of Product Segmentation
  • Product Segmentation for Business

I. What is Product / SKU Segmentation ?


Segmentation is the name given to the separation of all kinds of data into groups with similar characteristics using statistical analysis techniques and machine learning methods. 

Segmentation provides to find the common components of the processes under consideration and to manage  according to these components. 

Segmentation can be considered under many different topics. The most used segmentation approaches are Customer Segmentation and Product Segmentation

Customer segmentation, also known as profiling, consists of separating customers according to different profiles and taking the necessary actions according to these profiles. Many factors are taken into consideration while creating  customer profiles.  Some of these are demographic features such as age, gender, educational background, geographic region, occupation, salary, ethnicity or religion. In addition, the purchase or reaction status of the products offered by the user (clicks, likes, added to the cart, etc.) are also used as inputs for segmentation. Under customer segmentation, the most commonly used segmentation types are Behavioral Segmentation, Demographic Segmentation, Geographic Segmentation and Psychographic Segmentaion.

Customer segmentation and product segmentation are very important for the effective management of marketing and customer acquisition processes in many sectors such as ecommerce, retail, gaming, banking, insurance. 

In product segmentation, why the customer prefers / interacts with that product is examined, while in customer  segmentation, which product / product groups are preferred by customers is observed. When we look at this example, we can say that product segmentation and customer segmentation are very closely related. 

After the general definition of segmentation, our next topic will be about Product Segmentation, which we, as Trendify, are working on. 

Product Segmentation

It is the part of segmentation that is completely specialized for the product. It also appears as SKU ( Stock Keeping Unit) segmentation in the literature. Similar groups are formed by looking at many features such as the chareasteristic features of the product ( size, colour, etc.) stock and sales status, the demand for the product by the customer, the amount of sales in the past and the temporal change of sales. By looking at the obtained groups, actions specific to each group can be determined. Thus, decisions are made in the most optimal hierarchy, resulting in optiumum income.

The following example shows in general terms the important variables that are determined to be calculate the ideal stock level for the products in the retail area at the optiumum level.

From the chart, basically, it seems that there is a segmentation between the Economic Value Classification and the Variability of The Demand. However, other variables that make up these variables at the lower  level and serve the KPI metrics in the process are and should be included in the segmentation. The interaction of all  variables with each other is the solution of a complex process. 

While Recency ~ Shelf Life Demand is highly effective on variability, it can also directly affect Economic Value Classification metrics. Or Profit ~ While it is effective on Sales Economic Value Classification, it is also effective on Demand variability. Since drawing on multidimensional graphics is limited, the interaction of the inputs can be shown in parts. 

Importance of Product Segmentation

The purpose of product segmentation is to provide a suitable environment for companies or institutions to be positioned correctly, to know the product well, and most importantly for growth and development. 

In processes where there is no product segmentation, specific parameters (decisions) are given to each product or  general decisions are made. In the case of making a special decision for each product, the complexity is high and the  probability of error due to this heigh value is high. In the case of common decisions, complexity is low, but error is high because it is not possible to go into detail. With product segmentation, it finds the optimum hierarchy and makes decisions in this hierarchy. 

Product Segmentation for Business

A SKU (Stock keeping unit) is a product or service identification code. To give a few examples for SKU; 

  • Each item that is offered / has the potential to be offered for sale in your store. E.g; sellable perfume in a clothing store or a sweater size.
  • All products that can be sold in the automotive spare parts industry. 
  • All the variation in the gaming industry where players can customize their games. E.g; in-game purchase features, character customizations, in-game entertainment, etc. 
  • All the products you offer for sale on your e-commerce page. 
  • In the insurance industry, all changes that can be made to a person’s insurance package. 

Depending on the size of your business, SKU numbers can reach hundreds, thousands or millions If the number of SKU exceed hundreds a product segmentation is needed. Because, it is necessary to determine the decisions to be taken for the products in the most efficient way.

Organizations grow as the number of SKUs increases. As a way to harness the power of greatness, product segmentation can be used in almost any industry. 

Date : 30.12.2021

Author : Mustafa Gencer (Data Scientist , TRENDIFY)

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