Leveraging Demand Transference and the Halo Effect for Retail Success

In the world of retail, understanding consumer behaviour is of utmost importance. Two essential concepts that play a pivotal role in shaping retail strategies are demand transference and the halo effect.

These phenomena provide valuable insights into how changes in consumer preferences and product perception can impact the retail landscape. This article explores the implications of demand transference and the halo effect in the retail industry, shedding light on how retailers can harness these insights for better decision-making, inventory management, pricing strategies, and brand building.

Demand Transference:

Demand Transference refers to the change in demand for an item when a similar item is discontinued or a similar item is newly introduced in the assortment. Demand transference is also termed as the “ripple effect” in retail, as it is the phenomenon where changes in the demand for one product influence the demand for related products.

There are two components of demand transference:

• Substitution: When customers switch from one product to another due to the unavailability of a product.

For example, if a customer wanted to buy mango-flavoured yogurt of Brand 1, and it is unavailable, they can either buy a different flavoured yogurt of Brand 1 or buy mango-flavoured yogurt of Brand 2 based on their higher affinity for the flavour or brand.

In this example, both the alternatives have some demand transference from the base product and can be calculated to analyse and rank products that will have a higher demand due to discontinuance or unavailability of the base product.

• Cannibalisation: When customers switch from one product to another due to factors such as price changes or new product introduction.

If two products in the same product line offer similar features or serve the same purpose, the introduction of a new one can cannibalise the sales of the existing one.

Or, if a product with similar features is offered at a lower price point compared to another one, it may cannibalise the sales of the more expensive product.

Halo Effect:

The halo effect refers to the phenomenon when the demand for one product is closely tied to the demand for another.

For example, if there’s an increase in the demand for hot dog buns, it can lead to higher demand for hot dogs. Similarly, demand for bread is closely related and impacts the demand for butter/jam.

Alternatively, the halo effect can also work within a brand. For example, a retailer known for its premium electronic gadgets may find that customers are more likely to perceive its accessories, like chargers and cases, as high-quality as well.

Impact and Use Cases of Demand Transference and Halo in Retail:

• Demand Planning: Understanding demand transference helps retailers in demand planning and optimizing inventory levels. Insights around products that have a high affinity together or cannibalization effect due to new product introduction can lead to better demand planning, new product demand forecasting, and data-driven decision-making for retailers. For example, retailers selling dairy items like eggs, milk, and butter would plan for inventory of bread to minimise stock-outs and potential revenue loss.
• Promotion Planning: Retailers can promote the purchase of complementary products through bundling or cross-promotions. This can lead to increased sales and customer satisfaction. For example, offering discounts when a customer purchases nachos along with salsa dip can boost sales of both products.
• Assortment Optimisation: Demand transference and the halo effect are the most important concepts to apply during assortment planning (planogram creation) in a retail store.

Placing related products (Halo effect) in proximity can boost sales for the retailer. For example, placing batteries near electronic devices can lead to increased battery sales.

Along with that, substitution demand transference influences the way assortment is done in stores. Based on the decision tree of customers, the entire layout of a category is decided.For example, if a customer wants to buy yogurt, and the decision sequence for the customer follows this pattern — Brand ➔ Flavour ➔ Size. In this case, the customer’s first priority is the brand they prefer; if the required flavour or size is not available, they’ll opt for substitute products within the same brand. Hence, the layout will include placing all products for a similar brand together, followed by flavor and size. This will enhance the customer experience in the store.

Conclusion:

In the fiercely competitive retail landscape, staying ahead requires more than just offering products on shelves. It demands a deep understanding of consumer behaviour, preferences, and the intricate relationships between products. Demand transference and the halo effect offer valuable insights that empower retailers to make informed decisions, streamline inventory management, craft effective pricing strategies, and build enduring brand loyalty. By harnessing these concepts, retailers can not only meet but exceed customer expectations, driving growth and prosperity in an ever-evolving marketplace.