Head in Tail

In 2009, Amazon.com acquired Zappos.com, a niche e-commerce company that sells shoes and clothes and in 2010, it acquired Quidsi, which operates Diapers.com, a niche e-commerce company that sells baby products. Though Amazon.com is already selling everything, it has acquired many niche e-commerce companies and has validated power of niches.

The power of niches

In 2004, Chris Anderson, Editor of Wired magazine popularized 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 frontend 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 whereas offline stores have to keep physical products and due to increasing real estate cost, they are able to keep limited fast moving products.

Comparison of a Baby & Kids online store with a large offline store

The power of Internet and long tail strategy has given 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 Indian e-commerce market, mass and big retailers such as Amazon & Flipkart could be considered as part of the head as they are popular, sell almost all the categories and consumers of all age groups with various needs visit these stores, 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 a question arises when mass market players are selling everything, why niche players are required in the market? A popular specialist doctor is more valued by customers than a generalist doctor, similarly, a popular specialist store is more valued by customers then 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 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 become specialist in every category.

On the other hand, niche players (specialists) have strong focus and defined target group and they differentiate themselves through in depth understanding of customers’ needs, huge variety, high quality products, and exceptional services. Niche players have a clear value propositionand a focused positioning. By providing huge variety including long tail products, niche players are able to manage business economics and margins and need a smaller scale to get to profitability. They create consistency in communication through all the channels such as social networks, blogs, site content etc. and get preference in search results.

But, due to small market size only one player could create sustainable business in the each niche category, ie, tail and that one player has to become leader, ie, head in the niche market by serving customers through all possible means. Let’s have a look at the emergence of head in one of the categories in tail.

In online niche categories, baby & kids products category market size is much smaller as compared to others and in the demand curve, it would appear in tail. 2010 onwards several baby & kids products e-commerce companies have started operations in India.

Today, few of them have shut shops, a few are surviving and one has emerged as Head in Tail.

Firstcry.com has been able to become the market leader in a highly competitive market because of differentiation & innovation.

• Formula of Failure:

Higher Discounts+ Marketing Cost+ Operational Cost+ Logistics Cost = 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 & customer acquisition) + Lower Discounts on Long Tail Products (Customers don’t find these products at other places and 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 e-commerce site, it has more than 10 lakh+ happy customers and more than 70% of them are repeat customers. But, it has not kept itself limited just to an e-commerce website. To reach out to customers in tier-2 and -3 towns and to create a positioning in metros, it has started many franchise stores. The thing that differentiates Firstcry.com retail stores from other retail stores is the insight on customer demand that Firstcry.com gets by analysis of purchase behavior through 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 products’ brands, it has started baby box program and reaches out to thousands of unique parents every month through maternity hospitals and parents get connected with the brand as soon as baby is born.

To move towards profitability path and at the same time to provide great delivery experience to customers, Firstcry.com started logistic arm and is not only taking care of Firstcry’s deliveries, but also of a few other e-commerce players.

Many other innovative revenue models are either in pilot mode and their evolution would create a lot of value for customers & 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 & resources, it would not be able to make a profitable business, but by serving a niche category and by becoming head in the tail, an ecommerce company could capture a huge market share of that niche, by being known for its speciality could become a acquisition target for bigger players.