The delicate balance between variety and efficiency has challenged brick-and-mortar businesses for a long time, and is even beginning to tax large e-commerce businesses like Amazon. The “long tail” refers to the fact that the majority of products often account for the minority of total sales. Yet, if a retailer can capture a large portion of the “tail,” they can generate good revenue in aggregate. The central issue is “how valuable is the long tail to a retailer, and how hard should they try to capture it?” To address this question, we analyzed sales in the Beauty products category on Amazon to understand when capturing the long tail is valuable.
We used the Profit Guru calculator along with our own Amazon datasets to determine sales percentiles and volumes for beauty products. We then constructed a power law model of sales volumes for products as a function of their rank on Amazon.
Sales volumes for top products can reach as high as 150,000 units per month while the slowest-moving products move a handful or fewer per month. As is often the case, sales volumes dropped off quickly with decreasing sales ranking, dropping to a little over 10,000 monthly units at a bestselling rank of 1000.
By the numbers: tails matter
Previous research by Terra Technologies found that for a large variety of brick-and-mortar retailers, roughly 50% of sales volume came from the top 1% of products, while 70% of sales were generated by the top 2% of products. These numbers illustrate how much retailers depend on their high-volume products to drive revenue. Yet, variety drives foot traffic, and maintaining this variety in a profitable way is central to the financial success of retailers.
We performed a similar analysis and found that Amazon carries roughly 1 million beauty products. The top 1% of products (top 10,000) generate 57% of the total sales volume while the top 2% (top 20,000) generate 67% of the total sales volume. Comparing this to brick-and-mortar, where the top 1% of products would amount to roughly 500 products, shows that Amazon has a much flatter power curve. Physical retailers thus rely more heavily on their top products to drive volume and revenue than Amazon does, and must choose their inventory more carefully.
How valuable is the tail?
While large brick-and-mortar stores generally capture value from the top ~500 products in a given category, Amazon can capture value from roughly three orders of magnitude more (~1 million). Said differently, the top 500 products on Amazon contribute only 17% of the total sales on Amazon, while they contribute roughly 50% of total sales in brick-and-mortar. Amazon generates 83% of its total sales from a product diversity that is beyond the ability of a physical retailer to offer.
These numbers demonstrate how large the long tail is for Amazon, and the impossible task of bringing all these products into physical retail. Amazon captures this long tail by keeping storage costs of these products to a bare minimum in large warehouses, and reducing its inventory risk by leveraging its third-party marketplace. Most of Amazon’s products are not on their books as inventory, and they are sold on commission with fees to cover overhead.
Physical retailers thus need to focus on capturing as much of the head of the curve as possible, while capturing just enough of the middle to balance the variety that consumers crave while keeping volumes and margins high.
Bringing e-commerce's strengths to brick-and-mortar
One way that traditional physical retailers can reap the variety benefits of Amazon is by building their own ecommerce websites and working with brands to offer products through drop-shipping arrangements. For example, Nordstrom has partnered with CommerceHub to offer many new brands on trial through a drop-shipping agreement with online-only availability on Nordstrom.com. The challenge with this strategy is differentiation – it is harder to offer a unique customer experience online, and to give shoppers a compelling reason to choose a physical retailer’s website over an established e-commerce player.
Another option that brick-and-mortar retailers have is to bring the same concept of a third-party marketplace in-store by working with a company like minoa. We enable brands to offer their products on consignment to retailers to reduce inventory risk, and even offer promotion fees to cover basic overhead and improve margins for retailers. This is analogous to paid ads and promoted listings on e-commerce sites. If you’re be interested in bringing your brand into brick-and-mortar retail, or are a physical retailer looking to bring on exciting products with boosted margins and no inventory risk, please reach out!