The Long Tail

The Long Tail: Why the Future of Business is Selling Less of More
Chris Anderson, Hyperion (2008)

This is an insightful book with an empirical model to explain the long tail phenomena in many markets. The application is left for readers to think about.

Long tail refers to the shape of the demand curve, with products on horizontal axis and sales on vertical axis. The head of the curve represents hit markets, where a few popular products generate huge revenues. The tail of the curve represents niche markets. Long tail means the curve grows to the far right, but never hits zero. What it means is there are a huge number of niche products, each bringing in little revenue by itself but, when aggregated, they amount to a significant market.

Check out the Wikipedia definition of long tail.

Long tail is present in many markets. SaaS (software as a service) reaches the long tail of small and medium business (SMB). Salesforce.com, which offers sales related software through the web, is the poster child for SaaS. SMBs are spared from the pain of installing and maintaining the software; instead, they can hit the ground and run with pay-per-usage.

Google taps into long tail of advertising by offering self-service software AdWords and AdSense. Long tail advertisers can easily reach long tail publishers because software does all the work in between. These long tail users wouldn’t have had a chance to play in the traditional advertising market where big players dominate.

Difference Between Traditional World and Long Tail

Economics of scarcity rules in the traditional world: retail has limited shelf space, radio has limited broadcasting bandwidth, theatre has limited screen time. We try to predict who may be the best sellers so we can allocate scarce resources to them to maximize profits.

Long tail is the economics of abundance thanks to low distribution cost (e.g. downloading music from internet), virtual inventory (e.g. buying from Amazon Marketplace), and low marketing costs (e.g. advertising on Google platform). With internet, consumers are presented with infinite choices and are armed with powerful tools to help them find what they want. Ranking algorithms and recommendation engines influence consumer decisions.

Three Forces in Long Tail

New producers are formed as tools of production become increasingly accessible. YouTube turns everyone into a film maker as long as you have the creative interest. Blogging turns everyone into an amateur publisher as long as you have some topic to talk about. Amateurs occupy the long tail where passion and personal reputation are the main motivation to produce, while professionals occupy the head where business considerations rule.

New markets are formed as internet dramatically lowers the cost of distribution. eBay enables everyone to be a merchant as long as he/she has internet access. Amazon Marketplace incurs little cost for distribution because it lends the virtual store front to merchants without physically moving the inventories around.

New tastes are formed when consumers use recommendation engines and peer reviews to explore beyond the worlds they know. Netflix reviews, Amazon recommendation, Yahoo! music ratings, and Google PageRank are all intelligent and adaptive forms of on-line word-of-mouth. Consumers trust peers more than advertising machines and it’s “wisdom of the crowd” in work.

Long Tail Marketing

New marketing tools and strategies come up to reach consumers in the long tail. Viral marketing is prevalant in social networks where friends refer their friends and friends' friends which exponentially expands the user base with low cost. Buzz marketing relies on word-of-mouth, which today has taken many forms on-line, such as recommendation engines, ranking algorithms, and user reviews. These filters are not stagnant but are amazingly intelligent with new user feedback built into the model at real-time.

One hilarious and audacious example is the consumer driven advertising launched by Chevy Tahoe. It's voted to be one of the 101 Dummest Moments in Business in 2007 by Business 2.0, but the result was incredibly good in terms of increased sales of the vehicle.

Web 2.0, Tippy Market, and Tipping Point

The Tipping Point: How Little Things Can Make a Big Difference
Malcolm Gladwell, Back Bay Books (2002)
Check out the author's website for more interesting discussions.

This book was written well before the surge of web 2.0 but is often cited in web 2.0 related articles. It’s a page turner which examines sudden changes in many social issues: Why did teen suicide rate suddenly shoot up in Micronesia? Why did NY crime rate plummet? How did Hush Puppies become fashionable all of a sudden?

Malcolm thinks products, ideas, and messages can be contagious and spread like an epidemic. A tipping point, as he defines it, is that one dramatic moment when everything changes all at once. Three factors are involved in tipping an epidemic and Malcolm has plenty of case studies to explain each of them in detail.

Here’s a summary:

1. Law of the Few – the specially gifted messengers who spread the message
2. Stickiness Factor – the messages that stick to memory and move people to action
3. Power of Context – the right environment to operate in

Law of the Few
Malcolm lists 3 kinds of people who, in a social epidemic, can bring new ideas and new products from visionaries to the mainstream, explaining innovations in a way that’s acceptable and understandable by the mass.

Connectors occupy many different worlds and have a special gift of bringing them all together. They seem to know everyone in a small number of steps (degrees of separation).

Mavens are info experts who not only collect info but also eagerly share it (e.g. do you have friends who are car mavens?).

Salesmen persuade. Great salesmen have a special charm to draw people into their rhythms and dictate the terms of interaction.

Stickiness Factor
In this info age, nothing seems to stick due to a vast amount of info bombarding us on a daily basis. “Stickiness engineering” deals with this challenge through simple changes in presentation and structuring of the info. A sticky message moves people to action in an epidemic.

Another great resource on stickiness:
Made to Stick: Why Some Ideas Survive and Others Die by the Heath brothers.


Power of Context
Human behaviors are influenced by immediate circumstances in a way more than we are aware of. One famous example is the Good Samaritan test conducted by Darley and Batson of Princeton University in 1973. The theory also explains that, under the right circumstances, events can take a dramatic change, like how NY crime rate plummeted after subway graffiti was cleaned up.

Tipping point allows us to do less and achieve more. However, we can't simply do what we think is right and hope the best for the result; we need to test out our intuitions in a trial and error process.

How do you think web 2.0 is related to the tipping point theory?

Web 2.0 Success Stories

Web 2.0: A Strategy Guide: Business thinking and strategies behind successful Web 2.0 implementations
Amy Shuen, O'Reilly Media, Inc. (2008)

Web 2.0 is a new business model which is still evolving when the book is being written. Nonetheless, Amy does a good job summarizing the strategies used by some successful web 2.0 businesses. It’s a very insightful book and well worth the time.

A few highlights:

Flickr is the poster child for collective user value and “prosumer” business model: users are producers as well as consumers. They upload photo images and enjoy other people’s contributions at the same time. Viral marketing leads to a rapid expansion of user base while incurring little up-front cost.

Google uses n-sided marketing to create and monetize on positive network effects (in this case, n = 2: both advertisers and users use the Google search platform). With each user search query or ad click-through, Google’s ranking algorithms feed the popularity and frequency info back into the system and increase the relevancy of keyword search. The more people use Google, the more valuable the system becomes. That’s the magic of positive network effects.

Facebook and LinkedIn are social networks built with minimal user acquisition cost. The more your friends use it, the more valuable it is to you. That’s a viral diffusion model. LinkedIn is more focused on professional connections and uses a “freemium” pricing strategy (free + premium): offering free access to build the critical mass and charging recruiters who wish to use the mass.

Web 2.0 also brings about a new wave of innovation when new technologies or markets combine with the old to create new ecosystem partnerships. Jajah, a web 2.0 telephony company, partners with local phone carriers and shares revenue with them, instead of threatening to replace them, as some if its peers do. Apple iPod is a great example of collaborating with media, production, and accessory partners.

There are more case studies on open source development, SaaS, corporate competence syndication, etc. At the end of each chapter, Amy posts strategic questions on: what if you are a CEO or CIO? What decisions will you make? It’s a thought provoking book for those who wish to start a new business or revamp their existing business.