Jeonghye Choi, Yonsei University, and David Bell, The Wharton School
Abstract: Offline retailers face trading area and shelf space constraints, so they offer products tailored to the needs of the majority. Consumers whose preferences are dissimilar to the majority — “preference minorities” — are underserved offline and should be more likely to shop online. The authors use sales data from Diapers.com, the leading U.S. online retailer for baby diapers, to show why geographic variation in preference minority status of target customers explains geographic variation in online sales. They find that, holding the absolute number of the target customers constant, online category sales are more than 50% higher in locations where customers suffer from preference isolation. Because customers in the preference minority face higher offline shopping costs, they are also less price sensitive. Niche brands, compared with popular brands, show even greater offline-to-online sales substitution. This greater sensitivity to preference isolation means that these brands in the tail of the long tail distribution draw a greater proportion of their total sales from high–preference minority regions. The authors conclude with a discussion of implications for online retailing research and practice.