Build a more profitable sales mix without raising prices using the Halo Effect

Most grocers have understood the thinking behind the Halo Effect, but they haven’t been able to unlock the full power until now. In the video below, Gary Saarenvirta explains how Daisy Intelligence uses leading-edge analytics to apply the Halo Effect to all of a retailer’s products to improve sales forecasting and build a more profitable sales mix – without raising prices.

Gary is the Founder and CEO of Daisy, which has released a new white paper: How to Leverage Halo Effects to Build a More Profitable Sales Mix - DOWNLOAD a copy today.

Video transcript, edited for clarity (Video runs 11:24) - Click here to watch.

Introduction

BILL : Hi. I'm Bill Bishop, Chief Architect of Brick Meets Click. I'm here today to interview the CEO of Daisy Intelligence, Gary Saarenvirta. Gary has been at the grocery business for a while, and he's got some very interesting concepts. We're looking forward to having him lay them out and help us better understand exactly what he's doing at the leading edge of analytics and grocery. Gary, good to be with you.

GARY : Hi, Bill. Thanks for having me.

Why focus on the grocery industry?

BILL : Just to set the stage, when did you get interested in grocery? Was there something specific that hooked your interest?

GARY : I have a technical education, a graduate degree in aerospace engineering, and when I got exposed to the grocery business, it was the volume of data that interested me. Back in the early 90s, grocery had terabytes of data, which was an astronomical number at the time. That really intrigued me and posed a technical challenge that appealed to my educational background.

Then I thought, everybody has to eat, we all need the food business. If I could use my technical skills to help the food business be efficient, that's great, because it ultimately helps us all.

What is the Halo Effect and how does it work?

BILL : Could you give us a short description of the Halo Effect and how it works?

GARY : The motivation came from my science background. I wanted to use that background to try to understand how customers buy. The thing that we realized while working on this is that customers buy solutions – meal solutions and grocery, not items – and the solution produces the Halo Effect.

There’s a positive Halo Effect: For example, because I bought ground beef to make hamburgers, I bought buns, and condiments, and salad, things like that. There's also a negative Halo Effect: because I bought one brand of product, I didn't buy another. That reflects the customer choice, and they choose one or another. And there’s a third impact: If a product is on sale, a customer may pantry load or buy forward. All three of these things make up the Halo Effect.

As a result, the Halo has both a positive contribution and a negative contribution, and if you use this information correctly, the net effect of the Halo is a positive contribution to the total retail store. Because it involves so much data, this is really something that can be achieved only through automation.

What challenges do retailers face when actioning the Halo?

BILL : When a retailer first learns about the Halo Effect, what kind of challenges do they face?

GARY : One challenge is understanding how to action it. Most of the retailers that I talked to about the Halo Effect understood it qualitatively. Related purchases, cannibalization and pantry loading are familiar concepts to all retailers, and they can deal with a few adjacencies in a typical term at a time.

But, as soon as you start to think of the broader Halo and how it applies to all of your products and – if you're a typical grocer with maybe 30,000 to 50,000 products – it becomes overwhelming. The volume of data and the volume of patterns becomes astronomical very quickly.

I think that's why the Halo Effect hasn’t been used to its full potential in the past, because there hasn't been the technology to tackle it and action it effectively.

How did the Halo concept become a part of Daisy’s foundation?

BILL : How did the Halo concept become the foundation of what you do at Daisy Intelligence?

GARY : We're fundamentally a technology company. And this technology addresses the challenge of dealing with the Halo Effect. For example, let's say you have 100,000 products, therefore you have 100,000 squared Halo interactions. That's like 10 billion interactions – 10 billion positive interactions, 10 billion cannibalizations, 10 billion pantry loadings for every week. It's an astronomical number, and to get the value from this information requires sophisticated technology.

The Halo concept is the bedrock of our technical capabilities, and it applies to all retail sectors, not just grocery. If you're buying paint to paint your house, you're going to buy drops, sheets, rollers, tape, etc.

Does the Halo improve sales forecasting accuracy?

BILL : I’ve heard that the Halo Effect has been quite useful in improving the accuracy of sales forecasting. Has that been your experience?

GARY : Absolutely. If you're doing traditional forecasting, it's typically a data exercise based on past history. You create a time series of sales data and then you try to extrapolate the future of that time series. It's not a theoretical concept.

When we forecast using the Halo Effect, there’s an embedded structure in the data, which is that customers buy solutions, not items, and this produces a constant ratio. By applying that embedded structure to forecasting, the structure is preserved in the data. If you can achieve that with forecasting, we've seen accuracy rates approaching more than 90% – even on promotional items, which are typically very challenging to forecast.

Can the Halo help retailers navigate supply challenges resulting from COVID?

BILL : Talking about applications, does the Halo Effect help retailers navigate the supply disruptions that we've seen here as a result of COVID?

GARY : For sure. Last year was a huge anomaly. When the pandemic began, we saw a dramatic spike in grocery sales in certain categories, like the panic buying of toilet paper and pantry staples. If you're using traditional forecasting, the assumption generally is that last year is representative of the future, and in the case of the pandemic, we know that's not true.

The Halo Effect, however, actually didn't change that much. The recipe for pasta Bolognese is the same today as it was during the pandemic – and before the pandemic – so these customer meal solutions are a constant.

We can take advantage of that when we're forecasting and managing our supply chains. This is one of the real value-adds of this technology. It doesn't require the longitudinal representative history, which challenges existing approaches and technology.

Does the Halo apply to omnichannel?

BILL : But does the Halo Effect impact the world in an omnichannel situation? Or is it something that just applies to the store?

GARY : I think it's fundamental to both the ecommerce channel and bricks and mortar, because it reflects how customers buy. If a customer is a purely an online shopper, we would expect to see those same Halo patterns, based on the meal solutions that they're buying.

If they're omnichannel shoppers, then they're really interesting. These consumers might be buying part of their solution in the store and part of it online. For example, you might not want to carry out a case of pop or large bulky items when you're buying in store, but you might want to hand pick your fresh items.

The challenging thing is to capture the customer’s Halo across the data of both bricks and mortar and the online world. That's an extra technical challenge, and our technology is up to the task of combining the data between those two channels.

Can retailers work with CPGs to leverage the Halo?

BILL : Is there a way in which retailers can work with their CPG brands to leverage the power of the Halo Effect?

GARY : Absolutely there's a CPG story here. We know that for retailers to succeed, CPGs need to succeed and consumers need to succeed. So, there's a collaboration that's required.

For the CPGs to understand whether a product is the Halo driver or falls into the Halo of other items is valuable information because it may impact how you fund.

If a product is a Halo driver, then supporting promotions makes a lot of sense.
If a product is in the Halo of other items, then maybe everyday support is more appropriate, and knowing when that Halo driver is going to be promoted is also important.

That kind of information sharing will help both retailers and CPGs.

What changes need to be made in category management to accommodate the Halo?

BILL : What kind of changes need to be made in the category management process to fully accommodate the Halo Effect?

GARY : Let me just say that category management has been a wild success in grocery, and we don't advocate tearing that down and replacing it with something different. I think augmenting category plans with Halo plans is the place to start.

Retailers could consider this: I have my category plan, how does the Halo Effect augment what I'm doing today? This provides a stepping-stone to move something that's already highly successful forward and make it a little bit better with the Halo.

Over time, we can figure out how category management might change in the long haul.

What is the sales impact of embracing the Halo?

BILL : What kind of an impact have you seen in terms of the increase in sales when a retailer embraces the Halo Effect?

GARY : We help our retailers grow the Halo Effect by helping them choose the right items to promote and also the right items not to promote.

For example, when you promote the Halo items and the Halo driver, that's wasting ad space because you’re marketing to the same customer. Whereas if you promote multiple Halo drivers, you're catching the attention of multiple customers. So, by taking the Halo Effect into account in promoting, pricing, and assortment planning, we can actually increase the incremental impact of Halo.

We've seen our customers be able to more than double the incremental Halo effect. In the example shown on the screen here, we were able to grow the Halo Effect for one of our customers by 76% over a two-year period, which translated to about a 5% increase in year-over-year comp store sales, which is a massive impact.

Conclusion

BILL : From my point of view, what is exciting here is that you've very clearly defined a new concept, or at least you've brought to life a new concept, the Halo Effect. And more importantly, you've made it actionable. You've figured out how to use it. And you've shown, in a number of ways, how it can make a material impact on the business.

So, I'd really like to thank you for taking time today for explaining that. I hope others will follow up and try to learn a bit more about the Halo Effect, if they're not already engaged with it. Thanks very much for your time today.