This post about Long Tail was originally created on 2012-04-15 in Spanish.
These past days I have been reviewing the Harvard Business Review case study about Leadership Online: Barnes & Noble vs. Amazon.com, to evaluate the factors that determined why an unknown internet company ended up winning the battle against the almighty Barnes & Noble, by then the undisputed leader in the retail sale of books in the US.
One of the advantages of Amazon’s business over its competitor was its Long Tail model, a term popularized by Chris Anderson (editor-in-chief of Wired magazine) in an article in 2004 which later ended in a Book: The Long Tail: Why the Future of Business is Selling Less of More.
Note that the term Long Tail is not originally from Anderson, it is mainly based on statistical distributions (Pareto), and in this particular case arises from a post by one of his editors, Clay Shirky: Power Laws, Weblogs and Inequality.
The Long Tail Model
Basically what Chris Anderson comes to explain is the meaning of the sales model change from a Mass Market to a Mass of Niches.
Mass Market – Represents the model used in the traditional market, where companies suffer certain geographical or physical limitations, and where, thinking about their profitability (storage and distribution costs), they focus on the sale of items that have a quick exit. Based on the 80/20 rule (Pareto distribution), which says that 20% of the product generates 80% of sales (or even more). In general, a bookstore will accumulate more stock of books that have a high volume of sales, otherwise, it is not profitable.
Niche Markets – This model allows us to have a large catalog of products and cover all kinds of needs and interests (from different niches). In this case, the 80/20 rule becomes 98% because of the wide different consumption that is obtained. In a world with no packaging costs and instant access to almost all content, consumers consistently behave: they consume almost everything. Amazon is the perfect example of Long Tail for its huge catalog, and I want to emphasize that Amazon started without storage or distribution, using virtual inventory under the premise “sell everything, have little”.
Long Tail model success
Although it may seem that the niche model does not sell as much as the mass market, the sum of all the sales produced by all those niche markets produce a great benefit.
Let’s put an example: Borders bookstore has 100.000 titles, however, a quarter of Amazon’s total sales does not come from its 100.000 most popular titles. If we compare it with other libraries, the difference is even more exaggerated.
The paradigm shift is total, the sale of small quantities is profitable. Most of the businesses that succeed on the internet take advantage of the Long Tail in one way or another.
Sure this change is caused by the new online business models. In his article and book, Anderson cites a fairly clear example of how technology has facilitated this paradigm shift.
In 1988 a book was published about British mountain climber and his near-death experience in the Peruvian Andes. The book is named Touching The Void and although it received good reviews, it generated a modest success.
Ten years later a book by Jon Krakauer on the same topic was published. This book was called Into Thin Air and became a huge success. Suddenly, the book Touching The Void began to sell again.
By the time Into Thin Air was no longer sold, Touching The Void was still on the shelves and had achieved much greater success than the other book.
Having access to an “almost infinite” online catalog, along with real-time trend information and public opinion, caused a spectacular increase in sales of an unknown book. This would have been unthinkable in the traditional market, where it would have been very difficult to find a copy of the book.
Rules for a successful Long Tail
For Anderson, there are 2 essential concepts for every Long Tail company to work:
- Make everything available.
- Help the customer to find it.
As he points out in the book, the first point seems easier than it is in reality. Some products could have legal restrictions based on their distribution or property rights, so this is the main issue to grow exponentially.
On the other hand, the second point is more up to date. Think about all the recommendations systems (collaborative filtering). Long Tail businesses treat consumers as individuals, offering mass customization as an alternative to mass-market fare. Think about every known e-commerce player or big retailer and you’ll find it is investing in customer customization.
To succeed, the book proposes the following nine rules.
Lower your costs
1 – Move inventory way in … or way out, or use a virtual or digital inventory. In the way to reduce costs, Amazon is displaying a virtual inventory for its content and also for its merchants’ using its Marketplace program. A centralized inventory is so much more efficient than putting products on shelves in hundreds of stores.
2 – Let customers do the work. It is called “crowdsourcing”, and it is cheaper and more efficient than hiring someone. Customers can do a better job. Customer reviews often attract new customers and build trust. Collectively, clients have unlimited energy and time.
3 – One distribution method doesn’t fit all. If we only focus on distribution for a group of customers, we risk losing all of them. Multiple distribution channels are the only way to reach a broader potential market.
4 – One product doesn’t fit all. Microsegment the contents (“micro chunking”) so that people can consume and mix them as they wish. One product suits one consumer, many products suit many consumers
5 – One price doesn’t fit all. The power of flexible pricing. Variable or elastic pricing can be a powerful technique to increase the value of a product and the size of the market.
6 – Share information. Classifying or organizing the results, reviews, recommendations, etc. Offering information is best only when it helps to organize the options, and not to confuse them further. Transparency builds trust at no cost.
7 – Think “and” not “or”. This means is that you should think about one thing and another (attach), but not only one thing or another. You cannot think that when a sale is closed, there is one who gains and another who loses. In markets with infinite capacity, the strategy is to offer all the possible content and make it easier for the consumer to be less discriminatory between one option or another. In the end, “AND” is an easier decision for the consumer.
8 – Trust the market to do your job. There is no need to predict what will be successful, consumers will be in charge of making the products popular, and their reviews will ease its comparison and selection.
9 – Understand the power of free. One of the most common models on the internet is to offer a free service to attract users (freemium), and offer them a superior service under subscription (premium). Prices tend to follow costs, and in the digital economy, costs decrease. Why not distributing a digital service for free to find a higher audience?
That’s all folks!
As a first dive into the Long Tail concept, I think it is enough. I recommend reading Chris Anderson’s book. Years later, I still have it at my desk and it is not tough to read.
Maybe in the future, I’ll post details about the Amazon vs Barnes & Noble case study. But my main idea is to write about personal experiences using this Long Tail concept in e-commerce, mostly with dropshipping.
I hope you liked it. If so, please share it! If you have any thoughts or experiences to share, please leave a comment. And, if you want to stay up to date, don’t miss my free newsletter.
Thanks for reading.