"Long Tail" theory increases revenue and margins for wholesale and mail order suppliers
Modern Product Information Management used to sell high-margin niche products
The economic crisis has placed significant downward pressure on both sales and margins of the wholesale and mail order business. In parallel, customers are expecting their suppliers to provide an increasingly large and broad cross section or assortment of items in their online business. These realities has generated significant investment in the "Long Tail" theory, which promises higher sales and margins from the sale of niche products with low volumes. Although maintaining this kind of assortment initially appears complex and costly, it opens up high profit margins. Many companies are already achieving two thirds of their profit in Long Tail. Product Information Management (PIM) solutions provide an ideal solution.
Management of large data volumes is becoming increasingly crucial in wholesale and mail order – particularly in relation to developments in e-commerce. What are the key challenges? Selling through multiple channels is gaining in importance – for companies specializing in both B2C and B2B. Targeted selling through different channels, such as online stores, print catalogs and point of sale, opens up new sales target groups and increases brand awareness in the market. In future, the majority of international companies will be investing in multi-channel sales.
Assortment policy as a success factor
Alongside these marketing-based issues, the actual products offered for sale represent a key focus for suppliers' positioning. Item assortment policies in distribution is undergoing major changes.
In the past, category management meant always having limited space in the warehouse. Only a certain number of pages were available in printed catalogs. There were also restrictions in logistics – warehousing in particular restricted opportunities so much that most dealers attempted to find the ideal catalog assortment with the largest possible number of top sellers.
As a technical wholesaler, Fastenal supplies more than 100,000 customers worldwide with an assortment of 600,000 industrial components. They include Fasteners, Tools and various Maintenance Repaid and Operations (MRO) parts. "We deal in MRO, but our customers primarily expect detailed product descriptions and technical details", explains Bruce Loken, Product Data Management Director at Fastenal. "As a result, we are increasingly developing into an information broker. This means that we deal in product information", says Mr. Loken. The Fatenal Group is meeting this challenge with a Product Information Management (PIM) system from Heiler Software. The company, based in Detroit and Stuttgart (Germany), has been involved in product data management for a decade.
"In the past, many companies had to severely restrict their item assortments", explains Greg Wong, CEO of Heiler Software. For example, most only dealt with certain brands, or carried out segmentation of product groups and target groups. In a printed catalog, there are few alternatives, but online stores do not have this limitation. DGI Supply, the tool wholesaler in the DoAll Group, is also looking to make use of this advantage. "We maintain an item assortment of more than 100,000 items. However, our e-business customers expect tools to be available in several million versions", says Chief Operating Officer Bill Henricks.
Long Tail – Profit from numerous niche products
In a stationary distribution business, the range has to be closely linked to demand due to the limited sales area available. Therefore, the main focus is on mass market demand, while everything that is not profitable enough is excluded. This means that a relatively large number of products are not sold – this is what is meant by the "Long Tail". The diagram based on the work of Chris Anderson shows a long demand curve tailing off towards the X-axis.
On the left are the fast moving items, which have frequent demand – the curve is high and narrow. On the right, the long, increasingly thin "Long Tail" covers the many items with less frequent demand. If we look at the margins, this distribution has an interesting significance. Niche products often achieve considerably higher margins than top sellers. Therefore, this means that dealers have to neglect the many high-margin products due solely to limited storage space, limited numbers of pages in printed catalogs or limited IT systems.
The Internet provides significant cost advantages. A digital department store is made up of servers that can easily be expanded at any time. Adding a new product involves little more than a few additional entries in a database. And where necessary, some space in an efficiently operated logistics warehouse. But in the case of purely digital products, there are no physical rstrictions.
Optional Sales
(The American academic Erik Brynjolfsson researched the Long Tail phenomenon using the example of the book market. A typical bookshop constantly stocks between 50,000 and around 100,000 titles, for which there is an appropriate demand in the marketplace. However, these books are also available from Amazon, but their range includes a further 2.9 million titles. Brynjolfsson and his team analyzed sales and came to the conclusion that Amazon achieves up to 40 percent of its revenue from those books that cannot normally be found in a traditional bookshop.)
PIM as a basis for large assortments in e-commerce
The question now is why online store operators have not been greatly expanding their item assortments for years. Why do we find that typical B2C mail order companies have 300,000 items and not 3 million?
Unfortunately, it is often a problem of IT infrastructure. Servers, online store systems and search catalogs cannot deal with the management of mass data and millions of item links. Before products can be presented in the online store, the supplier must obtain and prepare the relevant data.
"Item assortments are often restricted by the fact that the product data cannot be efficiently maintained. A Product Information Management (PIM) system enables organizations to set up and manage extremely large item assortments, without rising costs for expanding their assortment", says Greg Wong.
"The right e-commerce strategy can reach new customer groups and bring significantly higher margins", explains Mr. Wong. The Long Tail theory has become a reality. Mr. Wong is sure that suppliers with the largest assortments will come to dominate the markets.
For the first time, PIM gives dealers an integrated process. Suppliers provide their item assortments electronically, and this data is then checked and stored centrally. It is then structured and prepared for presentation in online business. Wholesalers and mail order companies can arrive at the largest perfect assortments by involving their customers in the process.
Dealers are often unaware of the niche items that are in demand. They are sometimes obtained and delivered when requested by a customer but rarely become part of the base item assortment. Reviews, evaluations and inquiries from customers can contribute to an optimum expansion of item assortments. The PIM then allows new items to be immediately added to the online shop. Links to product groups, spare parts and accessories enable dealers to make better use of up-selling and cross-selling potential. Information such as "Customers who bought this product also bought..." help to optimize e-business in niche products and multiply the sales figures.
Customers can get everything they need from their supplier and thus become regular customers. They feel that the service and support they receive are tailored exactly to their needs and preferences. When they log in or enter particular search terms, every customer is provided with product recommendations tailored to their taste or requirements. In a dmc survey in September 2008, 44.8 percent of respondents stated that they view the quality of the product data as a motivating factor for success of an online shop. "Good e-commerce needs good product data - this simple formula sums up the critical success factor in e-commerce. Users expect their preferred online shop to provide high quality and extensive product data", concludes Mr. Wong. 
Requirements and advantages for Long Tail sales success with Product Information Management:
Requirements:
-Perfect product data management
-Self service features for customers
-Data maintenance optimized based on customer requirements
-Ratings, reviews and shopping cart links (Customers who bought this product also bought...
Advantages for dealers:
-Regular customers can be offered a far greater item assortment
-Customer retention is hugely strengthened
-Optimum use of cross-selling and up-selling
-Higher sales and significantly higher margins in e-business
*The Long Tail concept
The Long Tail is a theory developed by Chris Anderson. In 2004, the American journalist and Editor in Chief of Wired Magazine presented the concept of how a supplier on the Internet can increase profits by offering a large number of niche products. The name comes from the demand graph's similarity to a long tail.
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