In the past, our choices were dictated less by preference and more by scarcity. We were limited to what was available on the store shelf, the number of channels on TV, and even the number of books at the library. Nowadays, we have a new online shelf, seemingly endless, backed by online marketplaces and vast networks of distributed warehouses and servers.
But that is only part of the story. When Amazon opened for business in 1995, it already had more books than any physical book store in existence. The real game changer for Amazon and its video rental counterpart Netflix, was the ability to successfully recommend those millions of niche products based on customers’ previous interests and purchases, which in turn surprised and delighted customers.
This according to Anderson has resulted in the “shattering of the mainstream into a zillion different cultural shards”, a shift from large segments of customers choosing from a relatively small selection of products to micro-segments of customers choosing from a nearly unlimited selection of products.
This is the story of the long tail, a term coined by statisticians to describe those less frequent events that happen away from the center of a normal distribution curve. In the retail case, it refers to the ability of online retailers to cater to even the smallest and most obscure niche or interest.
Surprisingly, our analysis of brick and mortar retailers is that the long-tail isn’t limited to just the online space. We find that brick-and-mortar retail too is a great opportunity for long tail sales. We see clear evidence for this effect in physical stores — 90% of products are purchased by 1% of customers or less. Altogether, these long tail products account for over 58% of revenue.
One of the advantages of long tail products for retailers is that they actually have higher margins than top selling products. Unlike the infamous “loss leaders”, these products suffer from lighter competition on price.
While the revenue generated by long tail products is significant, the benefits of addressing long tail go beyond revenue. We see that many products are extremely important to very small segments of customers. For example, ethnic foods or food for diabetics.
Addressing very small customer niches isn’t limited to just those niche purchases; it has an indirect effect on those customers’ entire basket. Endless niches create great market opportunities for those retailers that are able to serve them and thus foster higher customer loyalty. That is why the long-tail is such a strong growth opportunity.
If your goal is to increase the share of customers for a long-tail product from 1% to 1.5%, the expected impact is a 50% increase in revenue. To increase the share of long tail product you have two options:
You could communicate those products to all of your customers through a mass promotion, such as a store circular. However, most of the customers will simply ignore irrelevant offers, and if overdone this may be push them to discard your circular altogether.
A better way is to target only those customers most likely to respond to the niche offer using predictive analytics. This is the more advanced option, and a clear win-win situation, in which the customer gets more relevant offers and the retailer increases both revenue and customer engagement. This can be done using a personalized circular, in which customers receive a personalized selections of this week’s promotions, or through personalized offers sent to e-mail, SMS or store app.
With personalization, you can create a one-to-one communications channel with each customer and deliver the offers that he or she most cares about. It is an opportunity to promote smaller niche products, and not just blockbuster products.
Our experience shows that personalization helps to change the discussion from price to experience and encourages customers to visit the store more often to redeem THEIR offers. The cumulative effect is increased revenue and profitability and enhanced customer engagement.