“Thin-Slicing” and Retailing on the Internet
—Wharton: Knowledge For Action
In this article, David Bell, Xinmei Zhang and Yongge Dai Professor of Marketing at The Wharton School, discusses how recent advancements have shifted the internet marketing model. Online stores can group customers together based on preferences—no matter their physical locations. The secret, he says, is "thin slicing"--that is, focusing on a narrow band of consumers, something that the internet makes possible like no technology before.
Unlike physical stores, Internet retailers often succeed best when they “thin slice” markets and offerings. Brick and mortar stores must typically carry diverse (and often ever-expanding) inventories that, because they serve fixed trading areas, need to carefully consider local preferences. But recent developments in the Internet retail space turn traditional assortment and stocking rules on their heads. Internet retailers can advantageously position to the narrowest of needs and still “agglomerate” many customers who share similar preferences, yet may be separated geographically. In this article, I discuss three principles for successful "thin slicing" by Internet retailers. These are: Understand the Scope, Focus the Line, and Motivate the Base.
Understand the Scope. The geographically unconstrained trading areas enjoyed by Internet retailers present the online retailer with a unique, new challenge: Understanding both virtual and physical “locations,” to determine which might generate the most customers, and why? For most products a good starting point is target population size, and physical density. The larger the target population in a location, the greater the potential opportunity; however, this benefit is tempered by the fact that the greater the target population size in a location, the more likely there will be a large number of offline stores there already serving it. So, an important nuance to this rule is the following. If two locations have the same total number of target customers but in one the proportion of target customers relative to the total population is small, this location will have much more online demand potential, everything else equal. Why? Because offline retailers face trading area and shelf space constraints, and therefore design their offerings with the “majority” in mind. The Internet retailer consequently has a natural advantage with “preference minorities” (a group that I have also observed as being relative price-insensitive).
Physical density offers both the online and offline retailer the benefit that customers are more likely to either have conversations about or observe others using a product. For reasons that are not completely clear, this also correlates with overall online activity. Thus, I’ve found that more dense locations tend to deliver more customers through both offline and online word of mouth. In short, the way customers use the Internet for retail is very much shaped by the physical environment in which they live. Successful Internet retailers understand the geography of their customer base, why some locations are good and why others are not. Fortunately, there is an abundance of high quality geographic data that can help with this task.
Focus the Line. Going deep in a product category resonates with consumers. I could buy my household products or baby diapers from any number of online sellers, but somehow it “makes sense” to go with the specialist, e.g., Soap.com or Diapers.com. The trade-off between specialization and broad appeal need no longer hold for Internet retailers. “Customer density” can be achieved by collecting a small number of customers from each of many locations. The customer gets the benefit of dealing with a supplier who “really knows and understands” the product category, and the retailer gains expertise from the simplicity of focus. In recent years we’ve seen successful examples of businesses following this principle even while offering only a few small number of SKUs. WarbyParker.com is revolutionizing the eyewear category, and DollarShaveClub.com is literally selling men razors for as little as one dollar per month. Specialization is not only possible but perhaps, from the customer’s point of view, even preferable. More and more, we see the emergence of highly focused, single product category players gaining traction with consumers.
Motivate the Base. For Internet retailers, the customer discovery process is complex. Physical stores with good locations capture customers who “pass by,” whereas Internet retailers need to motivate existing customers to spread the word to new, potential customers. This can also be a powerful advantage, for several reasons. First, a great deal of research shows that customer referrals are a very effective and credible form of marketing. Second, one sufficiently motivated customer might effectively reach dozens (if not hundreds) of other people. Third, and perhaps most important, personal referral utilizes “selection” effects and induces “treatment” effects. Specifically, an existing customer often has a deeper knowledge of who might be a good new customer than your company does. The customer may be better able to identify a target than your CMO. And you may get the follow-on benefit of “treatment effects,” which take hold when customers acquired through word of mouth “go forth and do likewise.” I’ve known many instances where customers acquired by word of mouth were twice as likely themselves to engage in word of mouth as those acquired by other means.
In what ways do you think you can use smart location and inventory decisions to maximize sales of your online offerings?
"Physical density offers both the online and offline retailer the benefit that customers are more likely to either have conversations about or observe others using a product."
Professor David Bell is Faculty Director of The Wharton School’s Advanced Management Program.
- Published May 2012