Do increases in consumer choice come from decreases in consumer choice elsewhere?

On the niche consumption trend and its drivers

Here’s a fascinating paper on a recent trend in household consumption: markets are becoming more competitive (supporting more products) while households are buying fewer products in any given category.

Here we see the that spending for the average household has become more concentrated to a smaller number of products (Herfindahl is a measure of market concentration).

Meanwhile, aggregate spending (across all households) shows an inverse relationship. Overall concentration has decreased which means spending is more evenly distributed across more products than before.

The authors explain that in recent years, consumers have been more able to find and purchase products that are best suited for the individual needs. They call this “niche consumption.”

This trend probably feels intuitive to you. If you look in your bathroom and fridge, you probably see some beverages or self-care products designed to appeal to a small and specific group of people. Your wardrobe might include clothes you found on Instagram.

Another intuitive way to think about this trend is as the physical manifestation of the recommendation engines we’re so accustomed to in the digital world.

Why is this happening?

We suspect the nature of product introduction and development, however, reflects recent progress in supply chain integration, big-data marketing research, targeted advertising, and the growing importance of online sales.

In other words, the barriers to create a new product and get it in front of people that might like it a lot have gone down. And as they’ve gone down, they’ve afforded consumers more product choice, leading to marginal improvements in overall satisfaction with the products in our homes.

This is a trend worth watching. Niche consumption in digital happened slowly, then all of a sudden, and mostly invisibly to those doing the niche consumption (you’re not swiping a card, you’re viewing an advertisement). Niche consumption in physical is more conspicuous. You go to the grocery store and suddenly there’s an entire section dedicated to low-sugar hard seltzers.

My question is what other sectors are ripe to niche-consumptionification? And which ones will resist? Lambda School will probably be a good example of the niche-consumptionification of education.

To see which sectors are next, I’d think to look for catalysts that reduce the barriers of product introduction. Lambda wouldn’t have worked without good video conferencing and a number of other innovations that enable their model of remote-teaching.

And there’s certainly something here around digital assets and open networks. Open and permissionless widgets you can string together or build on top of could lead to lots of product introduction around personal finance and more.

Something to consider though: it seems likely that increases in competition in one place is a result of decreases in competition somewhere down the stack.

For example, twitter offers niche consumption of both tweets and advertisements–the market for content is relatively competitive (would be interested to see a Herfindahl of tweet consumption!)–but this comes with a decrease in competition at the platform level. Same with most other big digital offerings like search.

Or consider how many more web and mobile apps we have access to. That competition is in part the result of concentration at the service-provider level (e.g. AWS).

Niche consumption for household goods is probably fueled in part by Amazon. Amazon solves distribution, marketing, and sales for upstart products. This increases consumer choice at the product level and decreases consumer choice at the marketplace level.

Can we use economies of scale to explain these dynamics? Perhaps where there’s concentration, economies of scale are marginally more beneficial. AWS or Amazon can offer something much better because of their size. Whereas Dasani can only offer something slightly cheaper than Lacroix (although Dasani sparkling water is really good). So we see more competition in sparkling waters than cloud infrastructure providers.

For crypto, which categories are sparkling water and which categories are cloud infrastructure?

Lots of open threads here I plan to revisit. What do you all think?