Published on: April 20, 2016
Content Guy's Note: The goal of "The Innovation Conversation" is to explore some facet of the fast-changing, technology-driven retail landscape and how it affects businesses and consumers. It is, we think, fertile territory ... and one that Tom Furphy - a former Amazon executive, the originator of Amazon Fresh, and currently CEO and Managing Director of Consumer Equity Partners (CEP), a venture capital and venture development firm in Seattle, WA, that works with many top retailers and manufacturers - is uniquely positioned to address.
And now, the Conversation continues...
KC: One of the things people have always referenced in discussions about e-commerce is the mythical "long tail," or the ability to offer far deeper and broader selections because of the lack of bricks-and-mortar limitations. But there recently was a story about how Netflix seems to be taking a different approach in its streaming business, challenging the "long tail" approach and offering a reduced library of films while emphasizing more and more its proprietary content, such as "House of Cards." I wonder if this is yet another case of something that was fundamental yesterday being less so today.
Tom Furphy: I continue to believe that one of the most important key fundamentals to e-commerce business models is the long tail. Large e-commerce platforms make it much easier to carry a large assortment. As long as a product can be activated on the website with a good image and strong content, it is on the shelf and available nationally. The retailer does not need to carry multiple units or redundant inventory of the product. It can place one case of product in one warehouse and be in-stock nationally. The incremental cost of carry a long tail SKU is small, but the marketing value is high. It’s a well-proven strategy.
This is especially true at Amazon, which is touted as having “Earths Biggest Selection” and as being the place where people can “find, discover and buy anything” they may want to online. The long tail is an incredibly powerful marketing vehicle for Amazon. People go to Amazon because they know they will be able to find what they are looking for.
The long tail allows the company to efficiently draw in new customers and upsell to existing customers. For example, a housewife from Topeka, KS may be looking for the 45th flavor of Jello for her new dish for the church bazaar. Her local store can’t economically stock every possible flavor of Jello. If they don’t have it, she can go online to find it and be directed to Amazon, thanks to their strong search presence. Once she finds it there - and she will find it there - she then signs up for an account if she doesn’t have one, provides her address and inputs her credit card information. Customer acquired! Even if Amazon only breaks even on the Jello, it is an inexpensive means to engage new customers.
The long tail also allows Amazon to grow the purchase volume of existing customers. It uses its marketing engines to develop recommendations, collect customer behavior and send targeted emails to customers. As customers respond to these marketing programs by making purchases, Amazon engines become smarter and market even more precisely to these customers. Over time, customer just expect Amazon to have what they need. The long tail plays a key role in this.
Curation in online commerce, on the other hand, is a very different, perhaps riskier approach. However, for certain smaller platforms or startups, it may be a necessity for differentiation and survival. One way to curate is to provide strong private label products or proprietary content. Done well, this can provide outstanding customer value in ways that larger platforms cannot. But, curation is fraught with peril. Get it wrong by either having the wrong products or not adding value, and there is a high cost, because you lose your credibility. And once credibility is lost, it is very difficult to get it back.
KC: So when Netflix shortens its tail - and to be fair, it still has a pretty long tail of movies and TV shows - it is making a calculated gamble that the best way to differentiate itself is through proprietary content (its version of private label) that it believes will make more of a difference than a longer tail/deeper selection. Of course, Amazon also is investing in private label content ... so there is no letup in the battle, which is taking place on a number of fronts.
The question is, when does curation make sense? And when does it not?
TF: I do think the adjustment to curation makes sense for startups or other players directly competing with large platform like Amazon. This is where food and other specialty retailers have an opportunity to differentiate vs larger platforms. They need to begin to think of themselves as trusted sources of information, not just sources of product. You’ve said that many times on MNB, and we’ve stressed that together in the Innovation Conversation. The larger platforms are going to continue to take share by helping people buy things. They do that via long tails, free shipping and innovative functionality. Retailers will have to keep pace with these innovations to remain relevant to their shoppers. But they can maintain and extend their differentiation by being the most trusted sources of information for their customers.
KC: I guess it is the same as in the bricks-and-mortar business - if you can't compete on one level, you have to embrace the things that make you special and turn them into your differential advantage. Trying to be what you're not never is a good option, and is the fastest way to break faith with the shopper.
But in a larger sense, is it inevitable that even a seeming fundamental of the e-commerce business such as the "long tail" is going to get challenged as the venue matures? (Even though it is hard to think of e-commerce as mature…) Because I guess that if the "long tail" is one fundamental, the notion of "curation" is another one … even though they would appear to be at odds with each other.
TF: I don’t think maturity makes the challenge to the long tail inevitable. I think a move toward curation becomes inevitable because Amazon and the early e-commerce players have developed an insurmountable long tail lead. So, for new entrants, it almost has to be about curation. I also think that better tech tools will enable larger platforms, or even grocery stores or CPG manufacturers to curate products for their customers. Good recommendation engines, usage guides and subscription/replenishment platforms will enable retailers and brands to both curate products and deliver great service at the same time. Think of it as locking in customers’ minds with functional tools and their hearts with valuable expertise and experiences.
And the Innovation Conversation will continue...
- KC's View: