Fortunately, data is readily available from Internet Retailer that can help verify whether this hypothesis has merit. Here is what I did with the Internet Retailer top 500:
- Excluded the bottom 200 sites, as sometimes companies can not be entirely honest about their sales, in order to make the top 500.
- Excluded companies with sales above $1.5 billion (outliers that can skew results).
- Excluded companies with sales below $16 million (may have lied about sales).
- Excluded companies that did not report how many skus are available online.
The table below illustrates key metrics from the analysis.
| Internet Retailer Website Performance By Number of Skus Offered | ||||
| Average | Annual Net | Conversion | Sales | |
| Skus Offered | Sales (000s) | Rate | per Visitor | |
| Segment #1 | 450,088 | $268,120 | 3.26% | $3.13 |
| Segment #2 | 48,043 | $206,243 | 3.25% | $5.54 |
| Segment #3 | 15,718 | $116,395 | 4.60% | $4.28 |
| Segment #4 | 6,914 | $150,526 | 4.39% | $5.96 |
| Segment #5 | 2,015 | $84,572 | 5.84% | $5.49 |
First, I don't want to suggest that any particular strategy is better or worse. Whatever is right for your brand is the right strategy. I am not advocating you should increase or decrease skus.
I do want to illustrate a few key findings.
- More skus yielded increased sales. It could be that these companies are more established. Or it could be that these companies sell more because they offer more. There was a healthy distribution of top-selling companies, and bottom-selling companies, in each segment.
- Conversion rates decrease as skus increase. Does this suggest that websites become more difficult to navigate as skus increase? Chalk that up as a possible hypothesis that needs to be studied.
- Not surprisingly, sales per sku decrease as skus increase. This is in-line with the hypothesis advocated by Mr. Anderson.
Good job, Mr. Anderson! The hypothesis has merit, so long as the company can execute the strategy profitably.
You may not have fully illustrated the "long tail effect" but you certainly point towards the negative aspects of providing too much choice (i.e. too many SKUs). This is what "the paradox of choice" is all about and this is what - for instance - Dell is now managing. I have two posts on the topic.
ReplyDeleteAdelino de Almeida
adelino.typepad.com
Wasn't it Kierkegaard who described "the agony of choice?"
ReplyDeleteThanks for the comments, folks.
ReplyDeleteAn interesting research project might include websites that make searching for products easy.
There may be more opportunities in increasing the conversion rate by thirty percent by helping customers find what they are looking for, than in chasing niche opportunities via increased skus.