Merchandise compatibility: an exploratory study of its measurement and effect on department store performance

Abstract

This paper proposes two measures of merchandise compatibility and calibrates them with classification-level sales data from customer survey research at several large department store chains. Compatibility indices have possible applications in the positioning of stores, the allocation of retail space, the design of promotional displays of advertisements, and the diagnosis and rewarding of sales performance which deviates from sales targets. In an empirical model which controls for pricing differences and other standard retail-related factors (e.g. household income, charge card ownership, fashion consciousness, etc.), a merchandise compatibility index is shown to be a significant positive determinant of sales per square foot performance across thirty-nine department stores. The systematic calculation of compatibility indices will make it possible for a retailer to create important new decision tools including: (i) a new kind of market share; (ii) a rough measure of sales ‘lost’ from present customers; and (iii) more complete price information for the creation of price points and/or zones.