January 30, 2007
Book Review
The Long Tail - Why the Future of Business Is Selling Less of More
Author: Chris Anderson (editor in chief of Wired magazine)
The Premise
The premise of The Long Tail is that the 80/20 rule no longer applies to many modern business models. Previously, limited by shelf space and distribution capability, companies needed to focus on creating a few “hits” that drove most of their profit. The internet now provides unlimited “shelf space” where millions of products can be offered. In “The Long Tail” of the market, the combined value of modest sellers and quirky titles now equals the sales of the top hits.
In short, our culture and economy are increasingly shifting away from a focus on the relatively small number of hits (mainstream products and markets) at the head of the demand curve, and moving toward a huge number of niches in the tail. Without the constraints of physical shelf space and other bottlenecks of distribution, narrowly targeted goods and services can be as economically attractive as mainstream offerings.
The Six Themes:
- In virtually all markets, there are far more niche goods than hits. That ratio is growing exponentially larger as the tools of production become cheaper and more readily available.
- The cost of reaching those niches is now falling dramatically. Thanks to a combination of forces including digital distribution, powerful search technologies and a critical mass of broadband penetration, online markets are resetting the economics of retail. Thus, in many markets, it is now possible to offer a massively expanded variety of products.
- Simply offering more variety, however, does not shift demand by itself. Consumers must be given ways to find niches that suit their particular needs and interests. A range of tools and techniques – from recommendations to rankings – are effective at doing this. These “filters” drive demand “down the Tail.”
- Once there is massively expanded variety and the filters to sort through it, the demand curve flattens. There are still hits and niches, but the hits are relatively less popular and the niches relatively more so.
- All those niches add up. Although none sell in huge numbers, there are so many niche products that collectively they can comprise a market rivaling the hits.
- Once all of this is in place, the natural shape of demand is revealed, undistorted by distribution bottlenecks, scarcity of information, and the limited choice of shelf pace. What’s more, that shape is far less hit-driven than we have been led to believe. Instead, it is as diverse as the population itself.
How do Long Tails emerge?
| Force | Business Example | Result |
|---|---|---|
| Force 1: Democratize the tools of production | Digital videocameras Desktop music and video editing software Blogging tools |
More stuff lengthens the tail. |
| Force 2: Democratize the tools of distribution | Amazon eBay iTunes Netflix |
More access to niches fattens the tail. |
| Force 3: Connect supply and demand. | Google Rhapsody recommendations Blogs Best seller lists |
Drives business from hits to niches. |
Force 1: Democratize the tools of production
We think of books in commercial terms, assuming that most authors want to write a best-seller and get rich. But the reality is that the vast majority of authors not only won’t become best sellers but aren’t even trying to write a hugely popular book. Each year, nearly 200,000 books are published in English. Fewer than 20,000 make it into the average superstore. Most won’t sell.
In 2004, 950,000 out of the 1.2 million books tracked by Nielson BookScan sold fewer than 99 copies. Another 200,000 sold less than 1,000 copies. Only 25,000 sold more than 5,000 copies. The average book in the U.S. sells about 500 copies. In other words, 98% are non-commercial whether they were intended to be or not.
Lulu.com is a new breed of DIY publisher. For less than $200, Lulu can not only turn your book into a paperback or hardcover and give it an ISBN number, but also ensure that it gets listed with online retailers. Once it’s listed, the book is available to an audience of millions. All of the top 5 self-published books have sold between 5,000 and 50,000 copies. 80% of profits from these sales go directly to the authors, compared to 15% for standard publishers.
Force 2&3: Democratize the tools of distribution and connect supply and demand.
Why do companies such as Amazon carry items in the long tail including many used and self-published books? That questions comes from old 80/20 rule thinking. In the online market, it simply does not apply:
| Title Rank | Wal-Mart | Rhapsody | Blockbuster | Netflix |
|---|---|---|---|---|
| 1-100 | 65% | 47% | 68% | 32% |
| 101 and up | 36% | 53% | 32% | 62% |
You can see the difference between online and offline markets in terms of the percentage of profits coming from “hits” vs “the Long Tail” of 101 and up.
Long Tail Rules
The secret to creating a thriving Long Tail business is two-fold:
- Make everything available
- Help me find it
The Nine Rules of Successful Long Tail Aggregators:
Rule 1: Move inventory way in….or way out.
Sears blazed the trail. It achieved its first big efficiencies with the old mail-order advantage of large, centralized warehouses. Today, the online sides of Wal-mart, Best Buy and Target are using their existing warehouse networks to offer far more variety online than they do in their stores. It is much more efficient than putting products on shelves in hundreds of stores. Companies such as Amazon have expanded to “virtual inventory” – products physically located in a partner’s warehouse (such as a used book store) but displayed and sold on Amazon’s site.
Rule 2: Let the customer do the work.
“Peer-production” created eBay, Wikipedia, Craigslist, MySpace and provided Netflix with hundreds of thousands of movie reviews. Self-service enables Google to sell advertising for a nickel a click. Users happily do for free what companies would otherwise have to pay employees to do. It’s not outsourcing it’s “crowdsourcing.”
Rule 3: One distribution method doesn’t fit all.
Some customers want to go to stores. Some want to shop online. Some want to research online and buy in stores. Some wants to browse in stores and buy online. Some customers are near stores; others are scattered. If you want to reach the largest potential market, multiple distribution channels are the only way to go.
Rule 4: One product doesn’t fit all.
Once upon a time there was only one way to buy music, the CD album. (Editor’s note: the author must be very young!). Now consider the choice; album, individual track, ringtone, music video, remix, sample of somebody else’s remix, streamed or downloaded, all in any number of formats. Recipes can be obtained individually, video games can be customized by character and characters can be further customized. One size fits one. Many sizes fit many.
Rule 5: One price doesn’t fit all.
Different people are willing to pay difference prices. EBay, for example, offers both auctions (usually lower price, but more effort and uncertainty) and “Buy It Now” (generally higher) prices. While iTunes has stuck with $0.99 a track, Rhapsody has experimented with track prices from $0.79 to $0.49 and found that cutting the price in half roughly triples sales.
Rule 6: Share Information.
The difference between an overwhelming shelf of look-alike products is the use of “ranking” to sort information. “Rank by price”, “rank by review” and other sorting data help customers choose. Sharing more information makes it easier for customers to make decisions and buy.
Rule 7: Think “and”, not “or”.
One of the symptoms of scarcity thinking is assuming that markets are “zero-sum”. Where there is room for only one product, choices have to be made to stock a certain colour or version. But in markets with infinite capacity, the right choice is to always offer it all.
Rule 8: Trust the market to do your job.
In scarce markets, you’ve got to guess at what will sell. In abundant markets, you can simply throw everything out there and see what happens, letting the market sort it out. The difference between “pre-filtering” and “post-filtering” is predicting versus measuring, and the latter is invariably more accurate. Make it easy for people to share reviews to help them make choices. Provide data to the market on what others are saying and buying. Don’t predict; measure and respond.
Rule 9: Understand the power of free.
Free gets a bad rap, evoking piracy and erosion of value. Already one of the most common business models on the internet is to attract lots of users to a free service (such as Hotmail or Yahoo! Mail) and then convince some of them to upgrade to a higher quality premium one that adds higher quality or features. Distributing free demo’s, free samples of music or the first 9 minutes of a movie uncut and online is relatively cheap are all ways to attract people to higher cost options.
This article is written by Elizabeth Cornish of The Performance Edge. Elizabeth is a member of The Business Advisors Alliance together with Stuart & Theresa Morley.