The Hyper-Personalized Business Model Trend
There is a strong movement in e-commerce toward niche markets. Reasons for this trend include market saturation, improved education and innovation, notes Jamie Hanton of Doubledot Media, a New Zealand-based Web development firm.
06/26/08 4:00 AM PT
In March 2008, online product sourcing directory SaleHoo conducted an e-commerce behavioral survey of its members. SaleHoo's members are dedicated online sellers and retailers, and they are knowledgeable and savvy e-commerce users. The survey was comprised of eight questions -- four demographic questions and four individual response questions -- and it was a follow-up to a similar survey conducted three years earlier.
The answers showed a shift in trend that is consistent with other e-commerce activity across the Web. In particular, the answer to the question "What products are you interested in sourcing for your online business?" generated a vastly different response than it did three years ago.
In 2008, more than 50 percent of respondents said that their search for sources included locating niche markets. The survey conducted three years ago yielded considerably different results: Only 20 percent of respondents mentioned niche markets. At that time, the majority of sellers wanted access to hot items such as iPods, Xboxes, and designer brand clothing.
The second question category that witnessed the greatest movement was "Where are you planning to sell your products?" In 2005, most respondents were selling on eBay and had eBay storefronts. In 2008, this statistic has changed dramatically, and there has been a visible shift away from eBay with most now setting up their own stores and using Craigslist, eCrater and other online auction venues to sell their goods. High seller fees and the changes at eBay were only mentioned twice in the survey, making it hard to draw a correlation between the apparent mass dissatisfaction with eBay and the move to other venues.
A Change in Direction
What these changes indicate is a move from popular markets and marketplaces to a more evenly spread distribution of sellers across niche markets and throughout what is called "The Long Tail." Wired Editor in Chief Chris Anderson coined The Long Tail in 2004.
In e-commerce, the term describes selling small amounts of scarce or hard-to-obtain products to many people. Due to traditionally low overheads and particularly low distribution costs, Internet businesses are able to realize The Long Tail. The shift illustrated in the survey shows a push towards The Long Tail and market fragmentation. This push has likely been caused by the following factors:
- Market saturation. The movement to niche markets has been precipitated by the oversaturation of popular markets. There is no shortage of new sellers online, according to the survey. At the time of the survey, 47 percent of the respondents had only been involved in e-commerce for three months or less. The 2005 survey showed that the bulk of sellers headed straight into popular markets when there were still gaps to be filled. This group of sellers are now established and are forcing the new sellers to find new markets.
This has two consequences. First, due to high supply volumes of "hot" items, margins for these items are rapidly decreasing. Many sellers are now using these items as loss leaders for niche items. Secondly, new sellers are considering more specialized markets and are having to readjust their business plans. Unless sellers have access to extremely cheap suppliers, they quickly learn that there is very little profit to be made in iPods and the rest of the top 10 eBay searches (with the exception of iPhones, due to their scarcity).
- The move to mainstream. Although e-commerce is not mainstream yet, census results have shown that e-commerce is slowly becoming more used and accepted. In the first quarter of 2008, just under 4 percent of all retail sales in the United States were e-commerce sales; compare this with the first quarter of 2004, where e-commerce made up only 2 percent of all retail sales. Furthermore, online Sales are expected to increase 17 percent this year, according to Forrester Research. At the end of the day, this is about simple mathematics: More people buying online means more demand for a larger variety of goods. The Long Tail is about catering for everyone. And as the "everyone" numbers increase, so will The Long Tail. A classic case in point is blogging. Once only the pursuit of entrenched tech heads, there are now billions of blogs in the blogosphere encapsulating every topic imaginable.
- Improved education. Just as the numbers participating online are increasing, demand for new information to assist those interested in e-commerce is growing. As the proliferation of online business education continues, users become more informed in their choices. The end of the period of trial and error can also be attributed to the shift.
eBay PowerSeller Jimmy Huber says he made a number of costly mistakes in his early days involved in e-commerce. Huber is now a community manager at SaleHoo, and though it sounds obvious, he recommends all online sellers research their target markets thoroughly first. Tools such as Auction Inspector, eBay's own Marketplace research tool and ChannelAdvisor all have features that analyze supply and demand on eBay.
- Innovation. As users become more educated, new innovations are developed. Good examples of this are e-commerce merchants like Etsy, where hand-knitted clothes for soft toys and pets are among a million other things can be purchased, and social networks like Ning, where individuality is celebrated and the tightest niches can be found.
Niche's New Focus
Niche markets are a move away from a one-size-fits-all mentality toward a more valuable customer experience. This is reflected in higher rates of online customer satisfaction in 2007. Netflix and Amazon polled the highest for customer satisfaction in an annual report released by ForeSee Results. Both companies have taken initiatives to make the customer experience more customized and more personalized, something that all retailers will have to do as the trend continues.
Personalization is about empowering customers and going further than lip service and the noise around crowdsourcing. Primarily, it's about listening to customers and providing tailored customer service. Even though e-commerce is in a better position to adapt to this, larger corporations can struggle. eBay has proved it is still set in its ways time and time again with its canned responses to customer service queries.
Real personalization occurs when the seller's knowledge complements the buyer. Starting a business as a hobby or because of a real passion is the key to succeeding in niche marketing. Plus, a background in the given industry is invaluable when thinking about which problems need to be solved.
Customization is best exemplified by make-on-demand site Ponoko, where designers upload blueprints and users then order the items to be made to their size and material specifications. Offline, Borders will be adding electronic kiosks in its stores that will enable customers to try self-publishing.
One thing is certain: Now that market fragmentation has started, it will only continue, and the e-commerce landscape in three years time will be significantly different than it is today. Expect specialization to become the norm as e-commerce moves toward hyper-personalized business models.
Jamie Hanton is a media manager at Doubledot Media, a New Zealand-based Web development company.