August 09, 2006

The Long Tail, Inventory Management, and Customer Loyalty

If you are like me (and I doubt you are), and you spend your evenings wondering what you are going to write about for your next blog entry, you have run across countless online discussions about The Long Tail, a new book written by Chris Anderson.

I have not read his book, but I have followed his blog and online discussions about the book. My interpretation of his thesis is that the internet allows companies to profit by marketing niche products to various customers. For instance, Apple's iTunes store does not bear a significant incremental cost by carrying Robbie Dupree's early 80s favorite "Steal Away" (ok, maybe that's one of my early 80s favorites). As a result, iTunes can appeal to a wider audience with virtually no additional overhead, yielding increased profit. Furthermore, Anderson would suggest that somebody like me can have a healthy blog by writing content that appeals to a small, but enthusiastic audience (that's where you come into the picture). So far, Anderson's theory has proven true, in the case of MineThatData.

Of course, Direct and Database Marketers understand the challenges surrounding inventory management, especially management of styles with limited and unpredictable selling behavior. When inventory management is practiced in a flawed manner, the impact on the profit and loss statement is disastrous.

I never directly analyzed the impact of an increase in assortment/styles/skus on customer behavior. Can the retention rate of loyal customers be increased from 60% to 70% by increasing skus from 100,000 to 200,000? Maybe retention rate doesn't increase, but items per order, or annual purchase frequency increases because of an increase in skus. My guess is that a dramatic increase in skus does not result in dramatic increases in retention rates, items per order, or increased purchase frequency. My guess is that a dramatic increase in skus could increase the audience who might purchase from your company.

Do any of you have any experience analyzing this topic? Even if you don't have any experience with the subject, what impact do you think increased assortment has on customer loyalty, purchase frequency, items per order, or the size of an audience willing to purchase from your brand?

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