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When to Implement a Recommendation System?

When to Implement a Recommendation System?

Avatar Michał Głomba
09 December 2020
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Decision to implement

Personalized recommendations have become yet another tool to navigate the store’s offer along with a search engine and a catalogue. As a result, their quality heavily impacts overall shopping experience of customers.

Considerations „Is it worth to implement personalization?” are no longer relevant. The only remaining question is: “When”.

A decision on when to implement a recommendation system will depend on a potential impact of personalization on the financial performance of a store and diversity of our store’s offer. In other words, on current revenue and number of products we sell.

Current revenue and traffic in a store

The actual effectiveness of a recommendation system will depend on a type of store, recommendation distribution in a customer journey or the quality of former types of product recommendations (if there were any).

Let’s assume conversion rate at the level of 3% and an average basket value of PLN 100, which means that every 1000 visitors generate 30 orders of a total value of PLN 3000.

If we assume that placing recommendations (which adjust to the behavior of our customers and products sold in our shop) will increase our revenue by 5% - by increasing the number of orders and total value of a shopping basket – then traffic totaling 1000 visitors shall generate revenue of PLN 3060.

recommendation system increases your revenue

Practical profitability threshold

One may wonder how significant the final effect of implementing personalized recommendations in the revenue increase needs to be for us to conclude that the investment is worthwhile.

In case of smaller stores we may assume that we aim at the minimum revenue increase of PLN 9000 a month. This is an arbitrary amount for the sake of simplicity of calculation, but you may want to do rescale it depending on the margin and your financial expectations.

Earning extra PLN 9000 a month of revenue – with a 3% conversion rate and 5% recommendation impact will need the following minimum traffic and average value of a basket:

recommendation system increases your revenue    

The above-presented estimations allow us to assess if we are already at the stage when it is worthwhile to focus on additional enhancements of a customer journey.

What shall be done if our store has just started its operation and we do not have a sufficient number of visits yet? In that case, putting all the effort into increasing traffic is going to be the best investment as it will significantly improve all our indicators.

Diversity of products

Yet another criterion to consider is the number of products we sell. If it is too small and limited to only a few or a dozen products then introducing recommendations will only disturb the appearance of our store. At this stage, we are able to display all the products we sell so that a customer can easily see them.

A minimum number of products in a store, which will allow to truly personalize the offer, in practice depends on diversity of products and number of categories.

We may assume that 100 products in a store is going to be the minimum limit at which personalization can have a positive impact on the experience of customers while shopping.

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