June 10, 2009, 12:00 AM

Figure the true cost of long-tail online merchandising, Deloitte advises

Selling online can garner enough customers to offer a wide assortment of items that might not sell offline, but failing to figure the cost of that long tail of products could dig a financial hole, Deloitte principal and IRCE speaker Kasey Lobaugh says.

A big advantage of selling online is garnering a broad enough customer base to offer a wide assortment of items that wouldn’t sell in any one store, but failing to figure the actual cost of that long tail of merchandise could dig a financial hole, Kasey Lobaugh, retail analyst and principal with Deloitte Consulting LLP will advise during his session, “Unlimited shelf space = unlimited opportunity for disaster,” at IRCE 2009 in Boston next week.

“The purple, polka-dotted mixer might not sell in any one store because there wouldn’t be enough demand, but on the web you can consolidate demand for it,” Lobaugh says. “What many retailers are doing is perusing the long tail of merchandising, expanding their assortment aggressively. But every time you add another item for sale online, even if you drop-ship it from a vendor, your costs can explode.”

For example, he says, a retailer takes on fixed costs for every purchase order it processes. “If you’re cutting a purchase order for 1,000 items, those fixed costs are spread pretty thin,” Lobaugh says. “But if it’s for two $120 items and the fixed costs are $350, that really cuts into your profitability.”

One of the best steps retailers can take to manage the costs and profit margins of a long-tail merchandising strategy, he adds, is to provide merchandise buyers with accurate visibility into the full and accurate cost of acquiring merchandise, compared to what those products can be expected to generate in revenue. Buying only one or a few items from a single supplier, for example, will probably have higher per-item shipping costs than items purchased and shipped in bulk.

“Buyers need visibility to make better decisions,” Lobaugh says.

It’s also important to review buying, storing and shipping procedures for individual products in a long-tail merchandising strategy, he adds. An item that’s in fashion today may be worth keeping in inventory instead of paying a premium for having it drop-shipped from a vendor, but a few months or a year from now it may not be selling enough to warrant taking up warehouse space. In that case, a retailer who still wants to offer it to the occasional customer may be better off paying drop-shipping costs, Lobaugh says.

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