The Pareto principle states that roughly 80% of the effects come from 20% of the causes. If you apply this to inventory management, it is fair to say that you must pay close attention to the 20% of products that contribute to 80% of your revenue, and you definitely don’t want to run out of stock for these products.
But I’m not here today to talk about how important these 20% of products are, since I’m sure you’ve figured that out. Instead, I want to introduce an alternative concept that lets you explore the potential of the other 80% of your products that only a few of your competitors are interested in. And that’s the B and C-Items that form the long tail of your inventory, the ones which are generally left alone that you only check on periodically.
The long tail is a concept established by Chris Anderson, who pointed out that the internet gave consumers choices beyond what was offered in physical stores. eCommerce offered niche markets the chance to appeal to their audience through major marketplaces like Amazon, streaming services like Netflix, and music stores like the iTunes Music Store. With cross-border eCommerce growing in popularity, coupled with affordable shipping (or digital downloads), there’s always someone out there looking to buy even the most specialized products.
Here are 3 reasons why we think you should start paying attention to the long tail and seize the opportunities present by that often-overlooked 80% of products.
Finding the right audienceThese alternative products mentioned by Anderson are also known as the C-Items in the above graph. In every market, there is a significant chunk of revenue tucked away in that long tail that is always at risk of being overlooked. Your C-Items may not be top sellers, but it’s not that no one wants them… they just need to find the right audience! And once that audience finds you, you’re going to realize that they’ll buy your C-Items, and conveniently pick up B-Items and A from you along the way (especially if they’re complementary) to take advantage of combined shipping.
While A-Items may be fast moving, these encounter plenty of competition from other retailers. After all, if a certain product is really popular with consumers, many retailers will jump at the opportunity to boost their sales by selling similar products. Moreover, if you’re selling the same or similar popular products as your competitors, there’s a high chance customers will flock to either big brands or the seller who sells it cheapest… and the latter means really thin margins where you generate little to no profit (let alone covering your carrying costs).
Building a niche
The deeper you go down the SKU popularity level, the less competition you have. And that’s how you build a niche in the competitive world of eCommerce - by differentiating yourself from your competitors. Perhaps you started out selling men’s accessories, but soon you realize that many others are selling accessories like yours. Your top seller is the simple leather belt, but you’ve got so many competitors on that front that it’s becoming a little hard to make any significant profits off these belts, and your brand is threatening to disappear into the clutter of the internet, pulling ahead only on the virtue of being the cheapest for its quality. However, because you’re a lover of watches and cufflinks, you stock watch movement cufflinks across a variety of colors and size. And you soon realize that while these cufflinks aren’t selling as fast as your leather belts (in fact, they’re selling quite slowly), people are buying them.
*Just for an idea of how different the market for these two items are, a search on Amazon for both terms showed 310,871 results for “men’s leather belt” as opposed to 994 for “watch movement cufflinks”.
After three months of watching the sales orders of all your products, you find out that about 60% of your revenue comes from your top selling belts. As for the other 30%? That’s from the sales of the watch movement cufflinks - many of which were purchased with your top selling belts. Admittedly, real life is rarely so convenient, but this example shows how long tail SKUs can work when it comes to creating a niche for your brand.
Finding the sweet spotStriking a balance between different products can be tricky…
As always, the key is to strike a balance between the two. Finding the sweet spot between your A and C-Items will even out your cash flow, allowing you to generate profits.
Profitable as C-Items may be, it wouldn’t make sense for a business to suddenly decide to stock only C-Items. Sure, your competitors won’t be selling the same products, but you’ll be stuck with tons of slow moving stock. Not fun! Especially since you’d have essentially given up at least half your revenue if you decide to make the switch to selling only C-Items. With slow moving SKUs, your inventory turnover rate drops drastically and you’ll see your carrying costs rise.
Neither should you stop getting rid of items that are on the verge of becoming dead stock. Not all C-Items are created equal, after all. While there are those like the example of watch movement cufflinks, which are desirable enough to a significant portion of consumers, there are other items which would have more trouble trying to find their audience. A low number of sporadic sales over a long period of time isn’t going to be enough to save these products from their future as deadstock, so axe these and focus your attentions on C-Items that sell. But how do you decide what stays and what goes?
Distinguishing the wheat from the chaff
It’s easy for a combine harvester to separate what’s valuable from what isn’t. But it’s not so straightforward for your business...
If you’re wondering how you’ll be able to drag out your lowest performers to face the chopping block in a sea of hundreds of SKUs, that’s where inventory management software comes into play. Intelligence reports can provide better visibility into the performances of products across the board; you’ll be able to sort your products by top sellers, letting you know exactly how much of every SKU you’ve sold, and most importantly the projected profit.
We know how important this really is because it comes up every time we talk to our customers. In a recent chat with the founder and designer of the jewelry brand Porter Lyons, Ashley Porter told us, “My favorite TradeGecko feature is the intelligence reports. We’ve been able to analyze all the data of what our bestsellers were by actually seeing the numbers and not depend on a hunch of ‘I know I sold this Coypu ring and this Backbone cuff and I think those might be the bestsellers’.”
Armed with this knowledge of how your items are selling, you’re ready to take advantage of the long tail. But you’re going to need to have faith in your inventory management system, and resist the temptation of gut feelings. Sure, people may be buying your C-Items - but the demand remains irregular, with occasional surges that make you feel it’s time to increase your reorder points.
But there’s a high chance that increasing your reorder point according to traditional calculations will only increase your risk of dead stock. If you’re intending to chase the potential of the long tail, a specialized demand forecasting system that factors in the latest data and seasonal trends can help you better predict customer demands and reorder points, ensuring you get the best bang for your buck. (If you’re already using TradeGecko, consider the Lokad Salescast add-on.)
Ultimately, there’s lots of opportunities in the long tail of inventory, and it also gives you an idea of what kind of items appeal to your target niche market so you can make the most of the C-Items you have. If you’ve already adopted the long tail of inventory management and have similar or different experiences, do leave a comment - we’d love to hear them!
Special thanks to Jack Phillips for leaving a comment on my recent WebRetailer post on Inventory Management and inspiring this post.