A closer look at the curve(s)
An
immediate mention of the Bell curve would ensure no one reads my blog beyond
the first line. Talking about the curves that mere mortals are interested in, I
remember myself once hunting for a bean filled "Simba" toy in the neighborhood
stores in NY. I couldn't find the thing I was looking for; to be handpicked and
shipped to a destination of interest. Simba being the protagonist in "The Lion King"
a landmark animation movie of our generation, not finding it left me a little
disappointed. So, I turned to Amazon and found instantly an abundant choice of
the product. I did not get to hand pick it, but got hold of the authentic Disney
collection. The reviews helped making sure it was a good buy. Not wasting much
time, I shipped it to be handed over on the desired date. Did it reach its
destination on time? How was it received? Or it was redirected abruptly while
in transit is a story to be told elsewhere.
The
fact that I was not able to find it in the neighborhood Toys R Us and Sears but
was able to find easily on Amazon.com with multiple vendors with recent reviews
implied that there was considerable demand of the product. Did the assortment
managers miss a trick somewhere?
Then
I wondered the product would have lost out in the assortment optimization/SKU
rationalization exercise.
Then I came across a theory which
contradicted the fundamental principle behind assortment optimization in the title,
"The Long Tail" by Chris Anderson. It talks about how the endless choices
available to the consumers are bending the 80-20 rule wherein the top 20% of
products make up your 80% of revenues. With the advent of digital commerce, the
incremental cost attached with carrying humongous assortment has drastically
reduced to become almost negligible. The once seemingly endless aisles of Wal-Mart
are no match when it comes to the practically endless, virtual aisles of
Amazon.
An interesting statistics published
in the book says, 25% of Amazon's music sales are with products which are not
available in a brick and mortar retailers assortment. It's more interesting to
know that this percentage is getting bigger by the day. The sales of these
titles are frequent but small in number and geographically diverse, but they
are not the constraints the online retailer has to lose sleep over.
The assortment optimization
fundamentally tries to optimize the number of products that would make the
maximum sales and SKU rationalization does the same with the SKUs within a
product line assuming the consumer picks the product from within the available
choices.
If I try and combine in a crude scenario:
A K-Mart aisle has 5 brands of a
product line and after the SKU rationalization it decides to do away with one
brand which makes the least numbers in terms of sales.
Now when a customer comes and tries
to find the brand which has been rationalized, he/she might not go for the
available brands but order it online. If this occurs a couple of times, the
retailer might just lose out on the customer.
You can't mistake the brick and
mortar retailer for optimizing its assortment as it has to maximize the returns
owing to the ever increasing costs involved in physical sales viz. the
inventory carrying costs, real estate prices, promotional expenses, etc. The
only comforting factor is the limited geography a store has to cater to. For
the online retailer though the market is limitless, the cost of sales is very
low. Only thing is, it has to ensure the search results are accurate enough to
show the relevant products on the first page or the consumer would switch
websites in a jiffy.
Visualizing the scenario on the bell
curve will tell you the brick and mortar retailers are trying to concentrate on
the chunk that generates maximum revenue and it makes sense for the online retailers
to spend larger efforts on the tail of it. In short, both are waging their
battles on the either sides of the curve.
It's not a level playing field.
Still, the game never stops!
-
Harshad Deshpande
