Niche and the Net - From Obscure to Profitable

CAMBRIDGE, Mass.--(BUSINESS WIRE)--Internet search engines not only make it easier for consumers to find that partridge in a pear tree, but it has made it both practical and profitable for companies to produce, market and sell such niche products, according to new research by MIT Sloan Professor Erik Brynjolfsson.

"More and more people are shopping on line, and as search costs also keep getting lower, relatively obscure types of products are becoming a bigger share of overall sales," said Brynjolfsson, who is also director of the MIT Center for Digital Business. "And as technology further lowers search costs to find obscure items, it creates even more incentives to create such niche products in the first place."

While the Internet is typically cited for helping consumers find products at lower costs, Brynjolfsson found that consumers actually benefit far more -- by up to ten times as much -- from increased product variety than from lower prices. Sellers gain as well. By using increasingly sophisticated search technology (such as recommended products, which are based on a particular shopper's product search history), on-line merchants are able to help consumers find, evaluate, and buy a far wider variety of products than can be found either in actual stores or traditional catalogs. Sometimes, search engines successfully steer web shoppers toward products they weren't even initially seeking.

Brynjolfsson and two co-authors analyzed consumer purchase data from a retailer that offers an identical selection products at identical prices via both the Internet and a mail-order catalog. He found that while the top 20 percent of products accounted for more than 80 percent of all catalog-driven sales, the same top products represented barely 70 percent of Internet sales. "This provides striking evidence of how lower search costs can lead to a less concentrated product sales distribution," he said.

It can also lead to new - or extended - life for products once seen as too unprofitable to market or distribute. "It makes little economic sense for a brick-and-mortar bookstore to stock or even buy a book that only appeals to a very narrow slice of the local population, or for the author to write it in the first place," he said. "But if enough people are able to find the same book on Google or Amazon, the worldwide sales can add up enough to make it a worthwhile economic venture.

According to ComScore Networks, which measures Internet activity, Americans made 6.6 billion on-line searches in just one month (April 2006), and Page Zero Media estimates that paid search advertising will total $15 billion in 2006. In the United Kingdom, said Brynjolfsson, more than half of all on-line advertising spending already goes to search-based products. "It's moving in that direction in the United States as well," he said. "The Internet has changed the incentives for people to produce and market. Traditional mass branding strategy is becoming less important and targeted search marketing is becoming more significant."