In E-commerce, Waste is (Sometimes) Good

Chris Anderson’s Free is an excellent book that explores the evolution of business models in the increasingly digital world. The book, published in 2009, remains highly relevant despite the rapid evolution of digital businesses. One chapter, titled “Waste is (Sometimes) Good,” contains insights that apply directly to e-commerce management.

Waste can be a good thing in a digital world, in which the marginal cost of producing one extra unit of something is near zero (and getting closer to zero everyday).  The cost (excluding labor) of producing one blog post, one YouTube video, or one product page on an e-commerce website is almost zero.   

The point that Anderson makes is not that waste is actually a good thing, but that waste, in the digital world, is relative.  What appears to be a waste to one person can be of value to someone else.  While one person could not imagine consuming certain content or purchasing certain products, someone else may derive pleasure or utility from doing so. 

Anderson comes from the world of media.  He’s the editor-in-chief of Wired magazine, which has both print and digital content.  For a print magazine, waste is very bad because it is costly.  To print a page is expensive, and there are a limited number of pages in each magazine.  He explains, “Since saying yes to a story proposal is so costly…my job is to say no to almost everything.”  Furthermore, once a story is approved, it’s unchangeable, and if a better story comes along, he has to continue with what he approved. 

Anderson explains the stark contrast in managing his digital business:
Online, however, pages are infinite and infinitely changeable.  It’s an abundance economy and invites a totally different management approach…Our default response to story ideas can be yes, or, more to the point ‘Why are you even asking me?’  The cost of a dull story is mostly that it won’t be read, not that it will displace a potentially more interesting one.  Success rises to the top, while failures fall to the bottom.  Everything can get out there and compete for attention, winning or losing on its merits, not a manager’s guesswork about what people want.
One can make near identical comparisons between brick and mortar and e-commerce.  In a physical store, shelf and stockroom space are limited, and to ensure a product does not go out of stock a store must carry enough inventory to meet demand.  Bringing in a new product requires markdowns on whatever it’s replacing, and it also requires physical labor to merchandise the new product.  As a result of these costs, a buyer or storeowner’s job is to say no to most product proposals.  In the same way that approving a story in print is a weighty decision for Anderson, bringing a new product into a brick and mortar should not be taken lightly.
         
The costs described above are almost nonexistent for online retailers.  No markdowns or physical merchandising are required to introduce a new product online.  For products that can be drop-shipped (sent directly from the supplier warehouse to the customer) the retailer need not hold any inventory.  Even if the retailer owns the inventory, the amount of product they buy will be significantly less than what they would have bought for their brick and mortar store(s).  This is why online retailers can carry millions of SKUs, whereas a Wal-Mart supercenter carries about 142,000.    

As Anderson notes, operating online requires a totally different management approach.  Those in online retail should always look to grow their product assortments.  Assuming a product is of acceptable quality and fits into your e-commerce assortment, there is no reason not to add it to your offering.  Even if it sells only sporadically, that is revenue that you may have otherwise lost.  Focus on increasing both the breadth and depth of your assortment: breadth will bring in new customers, and depth will reinforce your position as a destination within a certain category.    

Many online retailers operate niche businesses that would struggle as physical stores.  This Internet Retailer article highlights one small niche player, parentgiving.com, which sells products exclusively for senior care.  Such a narrowly focused business could not exist as a brick and mortar store.  Not only would the assortment drastically shrink, but the customer reach would decrease as well.  

Physical stores are part of the scarcity economy, whereas online stores are part of the abundance economy.  The best online retailers recognize this and always look to expand their assortments.  This is why Amazon has a third party seller program and Wal-Mart now offers what it calls the "endless aisle."  Those brick and mortar retailers who have an e-commerce presence but still manage their businesses with a scarcity approach are missing out on a huge opportunity.  The online business requires a vastly different management approach.  As Anderson explains, in a scarcity economy "everything is forbidden unless it is permitted," whereas in an abundance economy "everything is permitted unless it is forbidden."  

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