Market Basket Analysis: A Guide to Understanding Consumer Behavior in the CPG Industry

Understanding consumer behavior is crucial to make effective business decisions for any CPG company. Market Basket Analysis (MBA) is a widely used technique in the CPG industry to analyze consumer purchasing patterns and gain insights into their behavior. In this blog, we will explain what MBA is, its importance in the CPG industry, and how it can be used to improve business decisions.

What is Market Basket Analysis?

Market Basket Analysis is a technique that analyzes customer purchase behavior to identify relationships between products. It is a data mining method that helps identify which products are frequently purchased together and which are not. MBA can reveal correlations between products that may not be immediately apparent, providing insights into consumer behavior and preferences.

The basic methodology of MBA involves analyzing transactional data to identify frequently occurring product combinations. The analysis is based on the concept of Association Rules, which identifies the co-occurrence of items in transactions. MBA utilizes three important metrics: Support, Confidence, and Lift.

Support measures how frequently an itemset appears in the transactional data. It is the proportion of transactions containing a particular itemset.

Confidence measures the likelihood that an item B is purchased when item A is purchased. It is the ratio of transactions containing both item A and B to the number of transactions containing item A.

Lift measures the strength of association between items. It is the ratio of the observed support to the expected support if the items were independent.

Why is Market Basket Analysis important in the CPG industry?

MBA is essential in the CPG industry as it can provide valuable insights into consumer behavior, preferences, and buying patterns. By analyzing consumer behavior, companies can identify which products are often purchased together and which are not.

This information can help companies create more effective marketing strategies, optimize product placement, and improve product bundling. For example, if a CPG company finds that customers who buy chips are likely to buy soda as well, they can place these two products next to each other to increase sales.

Moreover, it can help CPG companies in making pricing decisions. By analyzing customer buying patterns, companies can identify which products are price-sensitive and which are not. They can then optimize pricing to increase sales and maximize profits.

For example, if a CPG company finds that customers who buy bread are likely to buy milk as well, they can offer discounts on milk to increase its sales and maximize profits.

Examples of Market Basket Analysis in CPG industry

Market Basket Analysis has several applications in the CPG industry. Here are a few examples:

Amazon.com: Amazon.com uses MBA to identify which products are often purchased together and recommends products based on the customer’s purchase history. This helps Amazon increase sales and improve customer satisfaction.

Tesco: Tesco, a UK-based supermarket chain, uses MBA to improve store layout and optimize product placement. By analyzing customer purchase data, Tesco can identify which products are often purchased together and place them close to each other to increase sales.

Coca-Cola: Coca-Cola used MBA to identify which products are often purchased together and launched a new product line based on the analysis. Coca-Cola found that customers who bought coke were likely to buy popcorn, so they launched a new product line that combined coke and popcorn.

Advantages and Limitations

MBA has several advantages that make it an essential tool in the CPG industry. It is easy to use, provides valuable insights into consumer behavior, and can help improve business decisions. However, MBA has some limitations that need to be considered. The results of MBA are based on transactional data, which may not be representative of the entire customer base.

MBA also does not provide insights into why customers purchase certain products together, which can limit the usefulness of the analysis.

How to perform Market Basket Analysis

Performing MBA involves several steps, including data preparation, data analysis, and interpretation of the results. Here are some factors to consider while performing MBA:

Choose the right data: MBA is based on transactional data, so it is essential to choose the right data source. The data should be clean, reliable, and representative of the entire customer base.

Define the scope: Determine the scope of the analysis and the products or product categories to be analyzed.

Set the metrics: Set the metrics to be used in the analysis, such as support, confidence, and lift.

Choose the tool: There are several MBA tools available in the market, such as Excel, SPSS, and R. Choose the tool that best fits your needs and expertise.

Interpret the results: Interpret the results of the analysis and draw insights from the data.