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.