IT’S never been easier for a bricks-and-mortar retailer to get online. Countless marketplaces (eBay, Etsy etc) allow companies to upload products and sell them for a slice of the sales price. And now the Swedish startup Tictail hopes to make it radically simpler for shops to gain an internet presence by creating customised virtual stores for free. Unlike other e-commerce enablers, Tictail doesn’t take a cut of any sales, but hopes to monetise extra features users can add to their stores.
But beyond the technical mechanics of e-commerce, there is a wider dimension to success online. In research published in the Sloan Management Review last year, David Bell, Jeonghye Choi and Leonard Lodish found that, while online traders theoretically have an unlimited ability to scale up, looking for customers is more tricky.
Traditional retailers are part of an existing market, and can target customers organically (though getting them buying is a more difficult proposition). Most customers are local, and primitive market research can be conducted using widely-available statistics. The Office for National Statistics, for instance, produces annual estimates of median household income ranked by parliamentary constituency. A physical presence also makes it possible to gain a subjective idea of what certain demographics are likely to want to buy. But internet retailers find this more difficult. Indeed, having an unlimited trading area can be a mixed blessing: there are no straightforward rules about where to find customers.
Some online stores have tried to get around this by making forays onto the high street. A pop-up shop or a partnership with a well-known retailer may be a good marketing tool. But this trend only highlights the fact that, while online retailers can be successful by targeting a large number of (dispersed) shoppers over a wide geographical area, they are not suddenly immune to some of the basic rules that enable bricks-and-mortar shops to thrive.
First, word of mouth is still a vital ingredient to online success. By profiling the evolution of several internet stores, the researchers discovered that, while initial online sales may be driven by higher offline product costs, the successful evolution of an online retailer is still overwhelmingly driven by customers passing on positive feedback.
Secondly, expansion is not random. The tendency is to assume that, since an online store can theoretically sell to anyone anywhere for the same price, business can therefore be broad-brush. Not so. Online retailers migrate from “great to good” by understanding the “outsized importance of niche locations”, say the researchers. Over time, online stores grow by absorbing customers that, while geographically separate, are similar demographically.
What this means is that online retailers still have to develop explicit geographical targeting. How? First, collect early customer data according to location. This can be used to isolate local variables like offline competition, and to profile certain demographics as more or less likely to purchase your products. Secondly, tailor your company to those demographics. This may not be the strategy you employ in the long run, but the researchers suggest that this initial targeting makes long-term success more likely. Finally, carry out location-based experimentation. It’s still possible to create differentiated store experiences for different people online. But by delighting these early customers, you can make the most of the benefits of word-of-mouth and thereby ensure your ability to prosper into the future.
Tom Welsh is business features editor at City A.M.