Retailers should be profiting from the long tail of e-commerce

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It's 1987 and I'm standing in the checkout line at Tower Records with Def Leppard's Hysteria in my hands. I pony up $12 and add one more CD to my collection.

Fast-forward 20 years and I, like you, buy music completely differently. ITunes is my defacto music store. I sample everything first, buy only the tracks I want, and can store them physically or electronically. My latest purchase, Joe Levano's 52nd Street Themes, is hardly mainstream and tough to find in any physical store. But thanks to iTunes' library of millions of songs, I was able to find exactly what I wanted. Adjusted for inflation Hysteria cost $21.67 while Joe's tracks cost me $9.99. Twenty years later, the consumer wins.

Fortunately pure-blood e-commerce stores win as well. By eliminating the physical constraints of shelf-space and inventory management, online retailers can offer a virtually unlimited array of products and services to an unlimited set of visitors - capitalizing on the niches that exist along the demand curve.

Many readers will recognize the familiar refrain of Chris Anderson's Long Tail economics above - connecting the niche preferences of consumers with specific products that result in a more profitable online business. While these economics are theoretically what all online retailers are seeking, how can stores make this a reality?

The invisible crowd. There are thousands, perhaps millions, of unique visitors that come to an online storefront each week. In the physical world these individuals have the benefit of being able to interact with other shoppers and store staff to help them find the products they're looking for. In the online world, however, the crowd of shoppers cannot interact in a fluid, natural way where like-minded consumers recommend products to one another. They are invisible to one another. And because the majority of online shoppers do not purchase products or leave feedback, they are also invisible to the merchant. Hence, this invisible crowd has a wealth of information, opinions and suggestions, which if harvested could create a more compelling experience for shoppers, and more profitable business for retailers.

To tap your site visitors, a textbook marketing strategy would suggest analyzing buying behavior using reports; segmenting buyers using buying and traffic patterns; building targeting rules; triggering the rule; and making the sale.

Unfortunately, this approach can only address a handful of segments at best, and rule development takes time and is unresponsive to market changes. Online retailers shouldn't look to their Web analytics alone or other click-path-based tools to do the lifting since these tools focus on traffic patterns and other explicit actions like downloads and purchases. They also need to beware of explicit surveys and user rankings, which will introduce survey bias into their segmentation strategies.

Instead, Long Tail economics demand a model that leverages a retailer's Invisible Crowd, or crowd sources. This model learns from shoppers as they use a Web site, and identifies the natural affinities that emerge. Online retailers shouldn't just focus on whether a shopper viewed a product, but whether they truly considered it, compared it and actually liked it. Fortunately, it is now possible to capture this wisdom through software that uses high fidelity inputs based on social science. Using these inputs, visitors' preferences can become clear to an online retailer, and the community can self-organize across multiple-dimensions where like-minded peers are obvious.

Moreover, by tapping the wisdom of invisible crowds a retailer can associate its products with specific buying contexts that can be targeted at all visitors instead of only those with rigid buyer profiles. No business analyst needs to pour over data or guess at the proper segmentation.

Targeting the right products. The main benefit of effectively tapping your invisible crowd comes in the form of dynamic product recommendations that lift conversion rates by 20 percent to as much as 200 percent. For example, when shoppers arrive at your site, it is possible to instantly determine their intent and display highly-targeted product recommendations. The recommendations feel natural because they are drawn from the collective preferences of like-minded shoppers. And the invisible crowd is inherently aware of seasonality and other trends, and naturally promotes those products that are becoming more valuable to your shoppers while demoting those that are losing their luster. n

Jack Jia is a founder and CEO of Baynote Inc., Cupertino CA. Reach him at jjia@baynote.com.

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