How Expanding Virtual Inventory Affects your Bottom Line

Can Adding More Products Online Give Your Bottom Line a Boost?

Back when Brick and Mortar was the only way to shop, retailers were confined to stocking products that would fit on their shelves. If a retailer didn’t have the item a shopper was searching for, that disappointed shopper would move on. Or they’d have to place a special order and wait weeks for it to arrive…

That was then, but e-commerce is now. With an e-commerce site offering unlimited “shelf space” online, a retailer can offer a larger virtual inventory that appeals to more customers. And while a retailer may be accustomed to showing just their high-demand items in-store due to a lack of real estate, expanding product selection online to include more niche offerings can bring in additional revenue.

Does it Pay to Expand Your Virtual Inventory?

A 2016 study in the Journal of Retailing at New York University titled “Does Greater Online Assortment Pay? An Empirical Study Using Matched Online and Catalog Shoppers” supports this notion. The study investigated “how a larger selection of products available online affected consumer spending.” To test, they used data from a popular US apparel retailer that offers both printed catalog and online shopping. The study was most interested in looking at differences in spending between high-demand products (offered in catalogs and online) versus those less-popular niche items (primarily online and hard to find in catalogs).

Results showed that “those online shoppers spent significantly more than catalog shoppers on both popular and low-demand products.” They spent almost 11% more per customer/year on the high-demand offerings and 250% more on the niche items. What does all this mean? That having an expansive virtual inventory composed of high- and low-demand items is more profitable than traditional selling methods where high-demand offerings are heavily prioritized. Online shopping, with its increased product selection and search capabilities, is to thank. It has made not only purchasing high-demand items simpler, but it’s also made discovering niche items easy.

The Short on the “Long Tail”

The increased reliance on those low-demand or niche products refers to a business model called “the long tail.” Essentially, it states that aggregate sales of niche products can be as profitable as the traditional sales model where a small number of best-sellers account for the majority of revenue. It’s essentially saying, “Yes, 20% of products in a category account for 80% of the sales, but what about that other 80% of products?” Just look at this example from Amazon and Barnes and Noble. The average Barnes & Noble carries 130,000 book titles, but over 50% of Amazon’s book sales come from titles outside the top 130k books. That means the market of books that are not the top picks sold in actual bookstores is larger than the market for the top-pick books! In other words, the biggest money here is actually in those smaller niche sales.

Long-tail is difficult and expensive to implement in a physical location (think Walmart). But the model often makes for a good business opportunity for web retailers.  Lower operating costs online allow them to turn a profit by offering products in lower demand. And thanks to advancements in technology that make expanding virtual inventory simple, even smaller retailers can take advantage of this strategy.

When is Too Many Choices Ever Too Much?

All that being said, it wouldn’t be fair if we didn’t talk about a conflicting viewpoint. Some say that too many choices can actually hurt sales. This idea relates to what has been called “The Paradox of Choice.” which was a book by the same name by author Barry Schwartz. The theory essentially states that people can be overwhelmed by too many options. When this happens, they either end up disappointed by their choice or abandon the buying process altogether.

Many economists say that there is never a circumstance in which adding choices could be detrimental. They say for those who want more options it’s beneficial, for those who don’t its a neutral effect. However, others cite evidence of businesses that have decreased the number of options and see positive results. Schwartz himself cites an incident where a large office supplies reducer reduced the number of offerings in its print catalog and found that in virtually every category sales increased.

Here’s The Final Word

Overall, there is still much debate on how the paradox of choice actually affects an e-commerce site (if at all). And it’s especially hard to validate when you look at the success of some of the most “long-tail” dot-coms out there… Think  Amazon, Overstock, and Wayfair. There are quite a few smart ways to mitigate any effect of choice overload in your webstore. Just ensure your site has top-notch search capabilities, product sorting/filtering, and clean landing pages sans too many promotions and products.

Many small retailers have historically pruned niche items from their offerings in store. Today, e-commerce has changed the landscape for how they can merchandise and sell. By expanding virtual inventory online, research does show you can boost your bottom line without sacrificing the profitability of your Brick & Mortar (or the health of your bank account).