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Got an E-commerce Company? Location Is Still King

The old mantra 'location, location, location' still applies to those selling online, a new study finds.
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The joy of selling online is location independence. Sure, you need to think carefully about the logistics of fulfillment and where to locate your customer-service folks, but when it comes to buyers, the charm of e-commerce is that they can--and do!--come from anywhere, right?

Not so fast, says new research out of the Wharton School. The study from marketing professor David R. Bell and doctoral candidate Jae Young Lee is based on a detailed analysis of online men's clothing retailer Bonobos.com and digs deep into how offline realities impact the company's online sales. The real world and the world of pixels, it turns out, are more intimately tied together than conventional wisdom might have you believe.

"This study dispels a couple of misconceptions. The first misconception...is the fact that the online world is somehow disconnected from the offline. The offline world explains a lot of what's going on in the online world," Bell told Knowledge@Wharton in a lengthy interview. Location, he goes on to say, is very important, and not just when it come to things like choosing a manufacturer or opening a physical office. Offline realities strongly influence where your online business' customers are going to come from.

"What we're finding is that it's still about location, but this time it's about the location of the customer. Where is that customer and with whom does that customer also live? That's what's really important in the world of e-commerce," Bell says.

Offline Run-ins, Online Customers

How does that work? It turns out a surprising number of Bonobos customers come to the company through offline connections. "Existing customers are often the most powerful source of new customers for a firm," Bell notes. "This social and learning effect was really quite large. Up to half of the new customers that came into the firm... got there because the information was shared from one customer to another in an offline environment."

Simply put, you might not have a physical location for people to cluster around, but that doesn't mean that other offline factors won't affect where your customers come from and how you acquire new ones. "The offline environment is going to explain a lot about the success in online sales. The firm really needs to think about what kind of locations are going to be most fruitful and why," Bell says.

He goes on to offer a practical example from the research: "The firm that we looked at...in locations where customers were more apt to talk to each other and trust each other, there was a greater sales diffusion online. The target customer in this case is a male, aged 25-45, who is somewhat fashion-forward. It turns out that a good proxy for where those males are congregating is the number of bars and liquor stores per capita in a location. We had some sociological theory that told us about interaction and then we were able to go to public data and find a variable that was actually a pretty good proxy."

Putting the Insights to Use

The link between liquor stores and fashionable men looking to shop online is unexpected and interesting, but is there a more general takeaway here? Bell insists e-commerce companies of all sorts can look to these correlations to better target potential customers and also plan any offline efforts, which the data suggests can yield big dividends when it comes to online orders.

"What everybody is realizing now, whether you are Rent the Runway or Birchbox or even Amazon, in addition to Warby Parker and Bonobos.com and many others, is that you really need to operate both online and offline," he concludes. "There are certain things that the online environment does for you--it makes fulfillment easy, it makes it easy to scale. But there are other critical things that offline does for you, as well. It makes it much easier to relay information to other people. It also makes it much easier to build credibility about your brand if you really have a physical world presence."

As an online retailer, are you spending too little time thinking about the offline lives of your customers?

Last updated: Aug 11, 2014

JESSICA STILLMAN

Jessica Stillman is a freelance writer based in London with interests in unconventional career paths, generational differences, and the future of work. She has blogged for CBS MoneyWatch, GigaOM, and Brazen Careerist.




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