Long-tail effect

Many research papers and articles have been written by experts on possible existence and illusion of long tail effect in the retail industry, specific to e-commerce. This post is a primitive attempt to simplify the long tail effect such that it can be easily comprehended by a beginner in retail industry.

Traditionally, the belief is that 20% of the products stocked by a retailer contributes to 80% of the sales revenue. i.e. More popular goods are sold very frequently (compared to uncommon or unpopular ones) and they generate most of a retailer’s revenue. By and large, this had been true on many cases, but the evolution of e-commerce in retail has shaken this belief to a reasonable extent. In-Store retailers always had the limitation of stocking only fast moving goods in stores to ensure that they don’t waste the shelf-space. However, this limitation is no longer true for many e-commerce firms, especially for the ones such as Netflix & Amazon (The oft-quoted examples).

Let us take the example of Netflix. If there is a physical store that rents out movies, then it can probably store a few thousand DVDs in the store depending on the store capacity. And it can stock only those movies which are quite popular and that can be easily rented out. However, an e-commerce company like Netflix can store at least 10 times more DVDs than such a physical store, in a centralized warehouse and if there is even a smaller demand for the unpopular DVDs, the revenue that it can generate by renting out such movies is very high.

In the Indian context, there are a few examples as well. Let us take an e-commerce firm such as Myntra.com, which is an online fashion retailer. The catalogue of dresses or shoes (for instance) in that website is pretty huge compared to a physical store, which gives the consumer an option to search more and choose the one that he/she likes the most. The cost of searching is less and the storage costs are not way too high, which enable a firm like Myntra to get benefitted by selling unpopular goods, which are not found in every other store.

However, there are 2 factors that primarily decide whether an e-commerce firm can really get benefited by this long-tail effect.

1. Costs involved in maintaining the supply chain – This concept will hold good only if the storage and distribution costs for the long tail of products is not expensive. I.e. This will be beneficial in case of e-commerce rental services which stock movie DVDs or firms that sell products such as books, dresses & apparels. Generally, long tail effect is not going to help a retailer who’s into selling perishable products.

1. Consumer behavior – The trick lays in predicting the right consumer demand patterns. It should be noted that the tail of products should not only be long but also should be able to draw customer’s attention to trigger a purchase.