So here we are in 2009 with unemployment reaching toward 10%, business failures at a 30-year high, and the ability to get small business credit almost at a standstill. Are these issues the cause or effect of something far more sinister?
Actually the old 80/20 rule of the business universe is just as likely a root cause for the downturn in American retail and small business. I’m sure we have all heard that 80% of our sales come from 20% of our products or 20% of our customers. Guess what? That rule is very questionable at the very least considering the impacts of the Internet.
The actual terminology for the 80/20 rules is “Power Law distribution”. Here is a graph to demonstrate the 80/20 rule.
To the left of the graph are the few products that provide 80% of revenue while moving to the right is the majority of products providing the least amount of revenue.
This phenomena works from both sides and directions of the sales vs. available inventory argument. On one hand a business might calculate their inventory needs based upon buying trends per product. On the other hand, a buyer might purchase products based upon the available selection and on hand inventory.
How does this affect you? Store and warehouse size, product availability, pricing, inventory levels, and even pricing considerations all need to take the 80/20 rule in consideration for business planning.
However the Internet greatly disturbs this somewhat hard to handle premise. The consumer is able to research product availability, pricing, options, and resources on a real-time basis. In addition they have the option of purchasing the products and services online at the same time they are performing the research.
The internet merchant is not saddled with expensive floor space, retails displays, on floor employees, licenses, or even some form of taxes like that of a brick and mortar style merchant.
We have, in recent years, seen the popularity of super-sized stores implemented by Target, Wal-Mart, and others to enable them to provide a wider availability of product offerings. They are attempting to capitalize on the one big weakness of the Internet. The “need it now” emotional purchase. They are also combining standard forms of non-food retail products with food related items in order to capture the one-stop-shop oriented consumer.
The next time you visit your nearest retail merchant take a look around and notice if they have increased or decreased their product availability and offerings. Either one could signal a merchant who has not yet taken time to understand the real long-term effects of the Internet. The hard-core truth is that they could be on their way to the small business graveyard.
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