Category Management in Retail: Definition & Best Practices

You have a finite amount of space within your retail locations to hold inventory. Every square foot counts; the last thing you want to do is waste it by showing product collections that don’t turn into revenue. 

Category management is a branch of retail operations that describes how you’ll diversify your product assortment to maximize storage space, improve profitability through the strategic sourcing of valuable products within a particular category, and offer better customer experiences.

If you’re unsure of the category management practices to follow when doing this for your retail business, you’re in the right place. We’ll share what effective category management looks like alongside best practices to follow when building out new collections.

What is category management in retail?

Category management is the strategic approach that a retail business uses to organize products within categories. It falls under the umbrella of business operations management.

When you can see the end-to-end performance of categories (from the procurement process to monitoring sales performance), you can keep costs down by making smarter inventory decisions, offering better customer experiences, and ultimately driving more sales.

Benefits of implementing category management

Better shopping experiences

Customers have more choices than ever. Products alone are rarely a differentiator—what matters more is the experience someone has with your retail business. 

Effective category management improves the retail experience because shoppers can easily locate exactly what they’re looking for. If that’s a winter coat, they can go to the “Coats” section to shortlist items that fit their criteria. 

With this approach to category management, shoppers get the same consistent shopping experience whether they’re shopping in-store or online. Omnichannel shoppers who browse your website before buying in-store, for example, can use categories to quickly find it. 

Categories can also act as a source of product discovery, particularly if you’re creating non-product specific categories like:

• Bestsellers
• Price (e.g., “Gifts under $50”)
• Use case (e.g., Blenders Eyewear’s “snow goggles” and “blue light” categories)
• Recipient (e.g., “Women’s clothing”)

Smart inventory management and cost savings

Analyzing performance is an important part of retail category management. When you know which collections are in demand and most profitable, you can make more informed decisions about which inventory to stock. This has a positive impact on your bottom line; you won’t be absorbing inventory carrying costs or hefty storage fees for unsold inventory.

Category management also highlights your most valuable suppliers—an important part of retail risk management. If certain categories are more popular and profitable than others, prioritize building supplier relationships with vendors who supply inventory for them. This can get you preferential payment terms, bulk order discounts, and expedited shipping if you run out of inventory with minimal notice.

📌 Pro tip: Shopify’s retail reports show the sales breakdown by product variant and type, allowing you to identify which collections drive the most revenue for your retail business.

More sales 

Managing categories provides opportunities to upsell and cross-sell similar products within the category to increase average basket size.

If you’re selling plants in your retail stores, for example, use strategic product placement to show items from your “Pots” category beside your “Cactus” collection. Shoppers—whether they’re looking for a product in either category—can see complementary products that encourage them to spend more and complete their setup. 

How does category management work?

Here’s what the typical category management process looks like for category managers within a retail business:

1. Data analysis. Consult market research, competitor analysis, and customer feedback to pinpoint any gaps in your current category coverage. 
2. Define category structures. Once you’ve highlighted gaps, define which products should sit within it. Consider subcategories here if the collection becomes too broad.
3. Assign category roles. Is the goal of the new collection to drive foot traffic into your store? Help shoppers locate routine items? Sell to holiday shoppers with seasonal collections? The category role dictates how you’ll display products within it in-store and any applicable promotions you might want to use to launch it. 
4. Determine performance criteria. Use key performance indicators like units sold, sell-through rate, or customer satisfaction scores that act as a framework for measuring success.
5. Plan implementation. Consider inventory storage, introductory offers, and in-store marketing campaigns to bring the new category to market and build excitement amongst shoppers.
6. Measurement and improvement. This quarter’s best performing categories likely won’t remain the same in the next quarter. Commit to regular data analysis to monitor category performance and fine-tune product assortment or category structures. 

Best practices for an effective category management strategy

Smart collections and tags

Long gone are the days of manually assigning each individual SKU to a particular product category. With Shopify, you can automatically generate dynamic product collections that dynamically update based on specific conditions, such as: 

• Product type
• Price (including any promotions)
• Tag, such as “seasonal” or “holiday”
• Vendor or supplier
• Inventory quantities
• Date added to show new inventory

This Standard Product Taxonomy allows for consistent categorization, which helps with managing product categories, automating collections, and improving sales channel performance—particularly as your product catalog expands. 

Navigation menus

Navigation menus help shoppers locate items they're looking for or browse items they're most interested in on your website. But, not all product categories need to be easily accessible. Too much choice can be overwhelming. 

Limit the number of top-level categories and create subcategories to drill down further into each one. If you’re selling furniture, for example, shoppers might go to Furniture > Office > Chairs when they’re shopping for an ergonomic chair. 

Breadcrumbs help shoppers navigate your website when they land on a product page. If someone clicks a link within a Facebook ad to arrive on your cream ergonomic chair but they were looking for a different color, for example, they can click the “Chairs” category in the breadcrumb navigation to see alternatives.

Smart navigation doesn’t just apply to customer-facing touchpoints like your online store. Make sure that your point-of-sale (POS) system is optimized for speed with a customizable interface that allows sales associates to quickly retrieve product details by clicking the relevant category. 

Shopify POS, for example, has a customizable smart grid that you can use to access products within your most popular categories and reduce checkout queues.

Product filtering

Categories are the first step to assisting customers with product discovery. Filters help them drill down further and find products that meet their criteria. 

Shopify’s Search & Discovery app lets you add filtering systems like:

• Price
• Color 
• Size 
• Material 
• Brand 

Configuring these filters in a unified commerce platform like Shopify lets retail employees whittle down large product assortments on the shop floor. If someone is looking for a pair of hiking boots that are less than $500, available in a men’s size 10, and made of leather, associates can apply the filters on POS Go and offer personalized product recommendations without having to memorize each item’s specific details. 

Sorting and ordering

The order in which you display products within a retail category impacts a customer’s ability to find what they’re looking for. On your ecommerce site, offer sorting and ordering functions like:

• Best selling
• Newest arrivals 
• Price (e.g. low to high) 
• Review rating 
• Popularity
• Availability 

Best selling and newest arrivals tend to be the default order within a product category. It helps retailers highlight exciting products and keep the experience fresh, or items that existing customers love and new shoppers probably would too.

Combine this approach with advanced sorting rules, like pushing out of stock items towards the end of the page, even if they are a best seller. Stockouts risk pushing customers away to find a similar product that’s available to buy instantly from a competitor.

SEO optimization

Some 63% of shoppers consult a search engine like Google when they’re discovering new products. Optimizing your product categories increases the odds of appearing in their search results. 

Be descriptive with these category names, using the verbatim your target market would search for. Keyword research tools and customer feedback can highlight phrases for your own collections. Use what you find in the category:

• Name and heading tag
• Description
• Meta title and description

Internal links also help Google contextualize which terms your product categories should rank for. If you’re writing a blog article about candle making, for example, link to your product category with the anchor text “Paraffin candle wax” to divert potential customers there, while also helping Google determine what the product collection is.

Collection images and descriptions

Collection images act as a visual point of reference for shoppers who are browsing your product catalog. This can either be:

• A single product, e.g., the category’s bestseller
• A combination of products, like a bundle of items from the same category
• The use case, like a photo of a bedroom for your bedding category

Descriptions work similarly, though they have the added benefit of persuading customers to buy and telling search engines what your category page is about. Effective category descriptions pull on your audience’s pain points, include keywords, and showcase your unique selling proposition. 

Custom collection templates

The layout of your category pages helps browsers scan your product assortment and locate items they’d like to learn more about. Grid view tends to be the most effective. It’s visually appealing and puts your product photography front and center. 

Shopify allows you to customize the layout of product collections—something Mandalyn Renicker, owner of Offbeat Bikes says “has been so valuable. 

“Not only do we now have beautiful landing pages nested within product collections that are super easy to navigate, but I can use native Shopify features like metafields to showcase important product information, which is really useful for our customers as they’re doing their research.”

Third-party apps

Instead of treating category management as its own standalone practice, use third-party apps to monitor sales performance and ensure a continuous supply of inventory within them. 

Get real-time insight into your inventory levels with apps like Stocky, which integrate with Shopify and each sales channel you’re using to sell. It can help you determine minimum and maximum inventory levels for each product based on previous performance and upcoming fluctuations in demand, then automatically draft purchase orders to send to suppliers when restocking. 

Even better: Implement a retail enterprise resource planning (ERP) system to pull data from your ecommerce platform, POS system, inventory software, supply chain software, and supplier relationship management platform into one dashboard. It'll show the bigger picture view of how categories impact performance and help you anticipate upcoming risks to ensure a continuous supply of products within profitable collections.

Challenges of category management in retail

Category management doesn’t come without its difficulties, particularly:

• Data management. When multiple stores are combined with an ecommerce website and marketplace listings, it quickly becomes almost impossible to pull meaningful insights. A unified commerce platform like Shopify makes this possible. The analytics feature pulls data from every sales channel for a holistic view of category performance.
• Profitability. Certain categories might appear successful on the surface, but sabotage your profits upon further investigation. Take a big picture look at category performance, including profitability metrics to determine how successful and effective a collection truly is. 
• Category positioning. Product category cannibalization happens when new collections pull sales from an existing category, as opposed to driving new customers. Get clear on how your categories differ from one another. A beverage brand that's expanding its collection might introduce a new sugar-free version of its cola (as opposed to another flavor), for example, to reach a new target market: health-conscious drinkers.

Manage categories effectively in your retail business

Category management is a complex process—there’s more to it than just grouping products together based on their use case or product tag. Put some thought into your product assortment, category differentiation, and how you’ll help customers use them. Continuous improvement is the key to success.

From filters and sorting features to navigation menus, Shopify lets you create dynamic product collections that update as your inventory information changes.

“Shopify POS and its backend reporting has helped us analyze our business, and understand which collections are doing well,” says Ale Tarver, sales manager at Assembly New York. “Being able to have one system where every aspect of the store is put together from the transactions, reading into the backend, to the website builder—that's been really, really helpful.”