In 2009, Amazon.com acquired Zappos.com, a niche e-commerce company that sells shoes and clothes. Again, in the year 2010, it acquired Quidsi, Inc., which operates Diapers.com, an e-commerce venture that sells baby products. Though Amazon.com is already selling everything, it has acquired many unique e-commerce companies and has validated the power of niches.
The power of niches
In 2004, Chris Anderson, editor of the Wired magazine, popularised the term ‘long tail’.
The picture shows a demand curve in which Head products are in high demand. Long tail products are in lower demand and contribute less in terms of unit sales.
But, here is the interesting mathematics:
The number of products in the tail (Big Number) x Revenue from sales of each product in tail (Small Number) = A very big number.
Online stores show pictures and descriptions in the front-end and stock inventory at huge warehouses in the backend, so have infinite shelf space and can keep niche products that are part of long tail. They can aggregate demand of like-minded customers from different geographies and even long tail products could be sold in large numbers. On the contrary, offline stores have to keep physical products and due to increasing real estate cost, they are able to keep limited fast moving products.
Baby & Kids Online Store vs. Large Offline Store
The power of the Internet and long tail strategy has given rise to opportunities to create full-fledged e-commerce businesses out of niche categories including the categories which have small market demand and are part of tail.
In the Indian e-commerce sector, mass and big retailers such as Amazon and Flipkart could be considered as part of the head as they are popular, sell almost all the categories and attract consumers of all age groups, but niche players such as Firstcry.com, Healthkart.com, Lenskart.com, etc. serve small market sizes and could be considered as part of tail.
Now the question that arises is: When mass market players are selling everything, where is the need for niche players? A popular specialist doctor is more valued by customers than a generalist doctor. Similarly, a popular specialist store is more valued by customers than a generalist store.
By being able to sell multiple products to the same customer, mass merchants (generalists) have the advantage of higher lifetime value of the customer. But, to maintain site layout consistency, mass merchants give the same kind of look and feel to all the categories and to meet the objective of profit of overall business, which is dependent on sales of both top selling and niche categories. Mass merchants focus more on top selling categories and are not able to gain specialisation in every category.
On the other hand, niche players (specialists) have strong focus and defined target groups, so they differentiate themselves through in-depth understanding of customers’ needs, huge variety, high quality products, and exceptional services. Niche players have a clear value proposition and a focused positioning. By providing huge variety including long tail products, they are able to manage business economics and margins and need a smaller scale to get profitable. They create consistency in communication through all the channels such as social networks, blogs, site content, etc. and get preference in search results.
However, owing to small market size, only one player stands to gain sustainable business in each niche category, that is tail, and that one player has to become leader, that is head, in the niche market by serving customers through all possible means. Let us have a look at the emergence of head in one of the categories in tail.
In online niche categories, baby and kids products category market size is much smaller as compared to others and in the demand curve, it would appear in tail.
Firstcry.com has been able to gain the position of a market leader in a highly competitive market because of differentiation and innovation.
Formula of failure
Higher Discounts + Marketing Costs + Operational Costs + Logistics Costs = Negative Margins = Unsustainable Businesses
But, Firstcry.com provides a huge variety of both Top Head and Long Tail products.
Firstcry’s strategy of success
Higher Discounts on Top Head products (helps in fighting competition and customer acquisition) + Lower Discounts on Long Tail Products (customers do not find these products at other places and are ready to purchase products at lower discounts and these sales help in managing overall business margins) + New Revenue Models + In-house Logistics + Efficient Operations = Positive Margins = Sustainable Business.
On their e-commerce site, Firstcry has more than 10 lakh plus happy customers and more than 70 per cent of them are repeat customers. But, it has not limited itself just to an e-commerce website. To reach out to customers in tier-II and -III towns and to create a positioning in metros, it has started many franchise stores. The thing that differentiates Firstcry retail stores from other retail stores is the insight on customer demand that Firstcry gets by analysis of purchase behaviour through the website. By having a proper understanding of how customer demand is changing with time and what products would give true value of limited shelf space, it has been able to create value for customers and profits for its franchisees. Today, it has 65+ franchise stores and has plans to open 400+ stores in next 2–3 years.
In collaboration with a few popular baby product brands, it has started a baby box programme and reaches out to thousands of unique parents every month through maternity hospitals where parents get connected with the brand as soon as the baby is born.
To move towards profitability path and at the same time to provide great delivery experience to customers, Firstcry.com has started a logistic arm which is not only taking care of Firstcry’s deliveries, but also of a few other e-commerce players.
Many other innovative revenue models are in the pilot mode and their evolution would create a lot of value both for customers and investors.
If an e-commerce company would try to serve every category and would head on compete with bigger players such as Amazon & Flipkart, it may get very less market share and due to price wars and lack of differentiation and resources, it would not be able to make a profitable business. However, by serving a niche category and by becoming head in the tail, an e-commerce venture could capture a huge market share of that niche, by being known for its specialty, and could become an acquisition target for bigger players.
About the author: Harsh Pamnani is former Senior Manager of TiE Mumbai and is an alumnus of XLRI Jamshedpur.