Distributors Can Unlock Profitable Long-tail Accounts with AI – Leveraging the Power of AI #9
Most distributors rely on a few top accounts to drive a majority of revenue. Sales teams focus on these large buyers because that is where they are most impactful. But, tons of untapped potential revenue lies stored in the numerous small accounts that fill out distributors’ account books. Until now, distributors have been unable to provide the personal service necessary to grow these small accounts. However, AI will finally let distributors activate these small accounts to capture big gains.
This structure of a few high-paying accounts and many smaller ones is hardly unique to distribution. Economists call this the Pareto Principle or the “80/20” rule, and it states that 80% of “causes” stem from 20% of “effects.” For distributors, that might mean the top 20% of accounts drive 80% of revenue. Or, for a media business that could mean that 80% of customers only watch 20% of the movies. Whatever the industry, businesses can increase revenue by defying the Pareto Principle and converting smaller spenders into bigger ones.
Tech writer Chris Anderson predicted that technology would enable this shift in his 2006 book titled, The Long Tail: Why the Future of Business is Selling Less of More. He argued that retailers could increase market share or total revenue by selling tons of low-demand products. To make this shift away from best sellers to niche products, however, retailers needed expansive inventories and large sales channels. The advent of the internet helped, but it was not really enough to bring Anderson’s predictions to fruition.
Today, AI is finally overturning the Pareto Principle and helping businesses cash in on the long tail of customers. Netflix is a great example of how AI makes this possible. Before Netflix, media companies strategically promoted movies that appealed to high-paying customer demographics. Because teenage boys were some of the most avid movie watchers, studios emphasized the action flicks and juvenile comedies that appealed to them. Producing content for low-spending segments, like women over 50, was simply a bad business decision, so those types of movies were seldom made or promoted.
Netflix, however, has successfully disrupted the industry with an AI-informed strategy. The media giant uses cutting-edge AI to create a hyper-individualized experience for each user. That is, Netflix collects and processes data on what shows each user watches or rewatches and what super-specific genres (for example, period romance or youth sci-fi) appeal to them.
This data allows Netflix to move beyond segmentation and approach customers as segments of one. In other words, they are not blindly pitching me on Orange Is The New Black because that show generally does well. They are hooking me on The Great Hack, because my data suggests I like documentaries and technology. They are not only creating niche products, but also using AI personalization to match customers with the right niche.
This winning strategy of using AI to activate the long tail is being copied elsewhere because it works. HBO, a media company known for few premier series, recently announced that it would be shifting toward a quantity first approach. It will begin producing more targeted shows to appeal to niche customer segments. Likewise, large businesses like Amazon and Walmart are increasing total sales by using AI to convert more sales with small customers and niche products.
Grainger is even pioneering this strategy in B2B. The large distributor is aiming for a 3–4% annual increase in market share and is betting on a strategy of catalog expansions and improved data analytics to get there. Grainger’s catalog expansion is good, but the AI tools that help customers “quickly find the particular product they need from among the millions available” are the real difference maker.
All wholesaler-distributors—with their massive inventories and numerous small customers—are well-positioned to monetize their long-tail accounts. Distributors currently spend lots of time and resources catering to top accounts. This highly personalized customer service is rightly reserved for big spenders, because spending lots of time and man power on small accounts is a bad economic bet. However, with AI’s automated personalized recommendations, distributors will finally be able to treat all accounts like big accounts and present every buyer with niche items ideally suited to them.
In a management service study, MIT professor Erik Brynjolfsson explains, “As companies invest ever more sophisticated information technologies that allow consumers to actively and passively discover products that they otherwise would not have considered. . . The balance will continue to shift from a few best-selling products to niche products that were previously difficult for consumers to discover.”
These effects will be exaggerated among multi-channel sellers, because multi-channel interactions have traditionally made it harder to understand customers. With advanced data analytics, however, multi-channel distributors will be able to know their customers better and leverage long-tail sales into growth.
Long-tail accounts have always been a large growth opportunity for distributors. But until recently, technological barriers have blocked businesses from activating these accounts. AI will bring personalized customer service to those buyers, pleasing customers, reducing churn and increasing distributor market share. AI-enabled businesses in multiple industries are successfully overturning the Pareto Principle and capturing long-tail revenue. It’s time for distributors to do the same.