Most general retailers have made huge investments in their on-line businesses but are still struggling to make money out of the World Wide Web. Yet their perseverance is more than justified. While off-line retailing is a mature, slow-growing business, the on-line market—albeit still fairly small—is expanding at double-digit rates. Moreover, customers increasingly demand an on-line presence from retailers.

The search for ways to make the Web profitable is therefore on. It is a considerable challenge, calling for skills that go well beyond those required to run an off-line business successfully. General retailers have always succeeded by striking a carefully calibrated balance between offering a wide choice of goods and the opportunity cost of offering each additional category. But customers in the savvy new generation who shop both on- and off-line have different expectations of Web-based retailing: they want greater depth of inventory as well as rich and relevant on-line product information.

For many pure e-tailers—and even for some retailers with substantial off-line expertise—the cost of trying to provide that depth and content has proved insupportable. But help is at hand from an established off-line strategy: category management.

How category management works

General retailers tend to be masters at managing...