A Parsimonious Model of Stock-Keeping Unit Choice

The authors develop a model to describe and predict consumer stock-keeping unit (SKU) choice in frequently bought product categories. The model posits that a product category consists of several salient attributes with numerous attribute levels. It represents a SKU as an attributelevel combination. The model uses 11 + 12 · (K +1) parameters to describe a K-attribute product category with 2 latent segments. This parsimony is achieved without discarding data or aggregating level of analysis beyond SKU. With the number of parameters not depending on either the number of SKUs in the category or number of levels in each salient attribute, the model is particularly useful for large product categories. The model utilizes three behavioral premises on how consumers choose products over time. First, consumers accumulate not only a product-level experience but also attribute-level experiences. Second, these experiences have both consumption and shopping components. While consumption occurs only for the chosen attribute levels and product, shopping applies to all familiar and available attribute levels and products. Third, the consumption and shopping experiences increase with attribute-level and product familiarities. The authors demonstrate the descriptive and predictive power of their model using a panellevel data set of sixteen categories involving 133,492 purchase incidences. In benchmarking against the models of Guadagni & Little (1983) and Fader & Hardie (1996) using a subset of seven small categories (with less than 200 parameters for both models), the authors show that their model fits 7% better in-sample and predicts 8% better out-of-sample in hit probability. In terms of adjusted pseudo R-square, the model is 8% and 11% higher in-sample and out-ofsample, respectively. This superior performance requires only one-half the number of parameters.

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