AI-driven smart merchandising: what it is and why your ecommerce store needs it

Do you dream of having your own personal online shopper?

Someone familiar and fun who pops up every time you go on a retail website. Like what you remember from retailers’ in-store merchandising: someone who actually listens, as opposed to talking over you or shifting the conversation to themself.

Someone smart who’s memorized your preferences, knows your habits by heart, and is on top of your pricing limitations. Someone who, if you draw a blank, such as while yakking away to an online-store chatbot about something on social media and forget what you’re there to find, still catches your drift and points you to just the right product.  

The benefits for a business

If you’re an online business owner, artificial intelligence–driven smart merchandising can offer that “dreamy” personal shopper experience to your ecommerce prospects, whether they’re heading to the search bar to find a specific product or just checking out product collections on category pages and product listings. AI analyzes site visitors’ preferences and comes to know their browsing behavior at a pretty comprehensive level. And, as more people flock to online shopping, as opposed to just frequenting physical stores where they can drive sales, AI is ever more dramatically influencing ecommerce marketing campaigns (as well as traditional retailers’ brick-and-mortar store operations).

AI-aided merchandising sounds like a complicated thing to implement, doesn’t it? The reality is that AI “personal shoppers”, including site search tools, can be easily embedded in your ecommerce platform, where they can quickly start impressing visitors and boosting site profitability.

What is AI-driven smart merchandising?

AI merchandising is a data-driven, sophisticated system that analyzes customer information to enhance product presentation and recommendations for individuals. As a direct result, these days, when shoppers go online, such as to pick up a few items at the grocery store or look for sports gear, they’re expecting more. They want more options and better online shopping experiences, and they expect to enjoy professional personalization throughout their ecommerce customer journey.  

And on leading sites such as Amazon, customers are getting exactly that. AI-aided functionality is streamlining the shopping process and refining online personalization to enhance companies’ bottom lines. AI-driven merchandising has moved from a supportive tool in the background to a key player in creating intelligence-based and rewarding shopping experiences that can increase a site’s average order value (AOV) and much more. 

How AI is transforming ecommerce merchandising

AI facilitates personalization in an online retail merchandising strategy with features ranging from savvy virtual assistants to seems-to-read-your-mind search. Since AI tools can scan vast amounts of data at a quick clip, they can acquire deep insights about consumer behavior. A virtual assistant or AI-powered search engine will, in a short amount of time, know your customers and their needs better than you probably ever could.

As a result, ecommerce merchandising seems to be making things feel much more personal for people. When AI is used effectively, online shoppers feel understood and taken care of. From the moment your target audience begins to search or explore, they now expect a pleasant, expedient shopping journey, starting with their arrival on the home page “storefront” through placing items in their shopping cart and proceeding through checkout. Their likes, habits, and past shopping adventures are considered, and that allows their priorities to be refined with each “Add to cart”, or even with just more scrolling.

Ecommerce merchandising strategy examples

Here are a few mini case studies of the ways popular retailers are using AI to inject mightiness into their online merchandising tools.

1: TargetTarget example

This omnichannel mega-retailer sells a myriad of products online, from furniture to clothing and groceries to bathroom accessories. It does this expertly because its ecommerce site is well structured and powered by AI. Target customers can sift quickly through eye-catching product pages with colorful product images on their mobile devices or computer screens. Then, as their digital fingerprints spread, they begin to see the right SKUs at the right times.

By making one-stop shopping simple, Target’s AI digital merchandising has generated huge success: in 2022, after several years’ investment in AI, ecommerce was driving around 20% of the retailer’s sales.

2. Sephora

In 2022, beauty retail industry leader Sephora, having launched an innovative in-person shopping experience, leveled up its ecommerce functionality. For starters, it integrated headless commerce technology, giving it more control over the online platform and greater flexibility. The company also revamped the site’s personalization capabilities with a more-user-friendly retail merchandising plan.

Now, thanks to facial recognition and visualization technology, shoppers can try on makeup like lipstick virtually, instead of going to the beauty-supply provider’s retail locations. For example, they can investigate the most compatible shade of a foundation from the comfort of their home:

Sephora example

Sephora then recommends complementary products in the retailer’s product catalog:

Sephora example 2

As Sephora has learned, when a shopper has tried out this type of modern personalization tool, they may be back for more engagement the minute they run out of beauty supplies or want to try new products.

3: Starbucks

The famous coffee company was already incorporating personalization in its retail stores — buy a latte or some other drink at a Starbucks and you know it’s yours because your name is scrawled — maybe hopelessly misspelled — on the side of the cup. That’s a nice in-person gesture, but online, Starbucks is taking personalization considerably further.

In its mobile app, the company delivers what amounts to real-time personalization. It stores granular data about its customer preferences and purchasing behavior and then, based on what it knows, begins to target app users directly. AI-powered algorithms quickly scan shopper profiles and activity, tailoring their notifications accordingly and showing them personalized offers and rewards.

Starbucks example

Predictive capabilities of AI in smart merchandising

AI exists best as a data-scanning resource, delivering fast insights on customer behavior, market trends, and inventory levels. But it doesn’t just deal with real-time data; it looks ahead.

As shopper data accumulates, both from websites and mobile apps, companies are connecting the dots between people’s past behavior and future preferences. For consumers, one’s own daily habits can seem sporadic; they may think of their preferences as being subject to change, and their personal patterns are difficult for them to detect. But in fact, humans have been found to be 93% predictable, with only a small minority being truly “spontaneous”.  

Because of this consistency, AI is starting to make accurate predictions about what a consumer will do. As AI data prowess advances, so does data analysis. Algorithms can accurately predict trends and behavior, as well as forecast demand and sales patterns. For instance, predictive analytics can ensure that someone’s preferred products are never out of stock, reducing the chances that they’ll be disappointed. 

Enhancing the user experience with AI merchandising

In an online and mobile world that’s awash in content, shoppers are looking for strong connections with progressive online retailers they can trust. That’s borne out by statistics like these:

  • A majority of consumers (71%) feel frustrated when a shopping experience is impersonal
  • Ninety-one percent of consumers are more likely to shop with a brand that makes relevant offers 
  • A majority of shoppers (72%) say they only engage with messaging if it’s personalized

A company that can connect with its potential customers on an individual level is naturally going to be better able to please and retain shoppers, resulting in stronger customer loyalty and, of course, you could increase sales.

So personalization, once considered strictly a nice to have, is no longer the proverbial cherry on the cake. It’s a necessity for companies that want to succeed in the fast-paced online consumer world. Many ecommerce business leaders are well aware of this potential impact on their metrics and are responding. For example, sixty eight percent of large organizations, 33% of medium-sized ones, and 15% of small ones in the United Kingdom have already incorporated at least one AI technology.

AI merchandising challenges

As with any new technology, AI merchandising leaves a few things to be desired. Here are some challenges that may go along with the process of adopting AI tools.

  • Integration. Implementing AI-driven merchandising can be a complex process, especially when mixing it with your existing systems and platforms. You’ll need careful planning and coordination to ensure a smooth transition.
  • Not compromising privacy: With the increasing use of customer data for AI algorithms, businesses must simultaneously protect their customer data and keep it secure. That means complying with regulations and implementing robust data-protection measures to safeguard personal information and thereby maintain customer trust.
  • Avoiding intrusiveness: There’s a fine line between personalization and an air of surveillance. Businesses must strike a balance between leveraging customer data to offer relevant product recommendations and respecting their right to privacy. If they can’t, then instead of upselling or cross-selling, for instance, they could easily lose customers altogether.

Despite bumps in the road like these, AI is undoubtedly having a major impact on conversion rates for companies in many industries. Globally, thirty percent of IT professionals globally say AI and automation tools save time, and 48% of businesses say the customer experience is better with AI.

The positive impact of AI merchandising on business performance

Getting back to the good stuff: if you’ve been on the fence about AI, why might you want to consider having your online business use it?

Here are a few benefits:

  • Agile movement: AI reads data in real time. It’s becoming faster and more accurate at scanning information and deciding what’s next. That means a business can react faster to consumer trends, shifts in demand, stock changes, and shopper preferences.
  • Data-rich decision-making: Leveraging data and the merchandising tools to wade through it, AI-driven smart merchandising empowers ecommerce stores. Market trends, customer preferences, and buying patterns are all made apparent. You can then make purchasing decisions based on what’s actually happening in the consumer landscape rather than on what you suspect is going on.
  • Higher sales: AI-driven smart merchandising is a proven tool for giving an ecommerce store a competitive edge. By providing personalized experiences, enhancing the customer journey, and optimizing operations, AI-enabled companies can differentiate from competitors and take a bigger bite of market share.
  • A promising future. This is just the beginning. As this technology evolves, we should see better forecasting abilities, visual and voice search capabilities, and entirely autonomous customer agents, among other benefits.

data-driven merchandising banner

Strategies for implementation 

Some quick AI merchandising tips:

  • Perfect your user experience: A great UX should be at the forefront of any AI-driven merchandising implementation. Prioritize creating user-friendly experiences with key elements such as strong visual merchandising, well-written product descriptions, and plenty of product reviews — the social proof — to enhance customer satisfaction. 
  • Do high-quality data analysis: The success of AI-driven merchandising relies heavily on the quality and accuracy of the data being analyzed. It is crucial to ensure that the data used for training AI algorithms is reliable, relevant, and up to date. Regularly monitoring and refining the data analysis process will help improve the effectiveness and efficiency of your AI-driven merchandising.
  • Protect consumers’ privacy: If you want shoppers to trust you, it’s imperative to get their consent for any tracking activity you’ll be doing and be transparent about your data usage.
  • Start small and scale: Rather than trying to implement various AI-driven merchandising strategies across your ecommerce store all at once, start with a pilot project. This will let you test and refine your approach, identify challenges, and gradually scale up your functionality based on your successful outcomes. 

Smart search, higher ROI

Ready to elevate your small-business or large, well-established ecommerce site online merchandising with powerful AI-aided search that can drive your retail sales higher?

At Algolia, we assist ecommerce website management teams in optimizing their shoppers’ product searches and product discovery with personalized shopping experiences.

Take the first step toward enhancing your customer engagement for reaching your ROI goals: contact us today!

About the authorCatherine Dee

Catherine Dee

Search and Discovery writer

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