The revolution of business concept.. The Long Tail??

Ever heard of The Long Tail concept before?? I have just finished reading this great article by Chris Anderson in Wired magazine from the year of 2004. It was terrific and amazing. It has changed my thoughts and inspired me to re-think of the business model that we used to understand. Just to share with you some of the main points of this concept.

The long tail is an economic concept that says the collective demand for less-popular items (in green) can exceed all the most popular added together (in red).The concept becomes even more prominent due to the fast developement of internet technology. Since the Internet reduces or removes the cost of distribution, the aggregation of sales of less popular items can be more profitable and successful than selling the most profitable items. In other words, if you can sell the exact right item to the exact right person you can make a lot of money if you don’t have to worry about storage and distribution of that item. Amazon is a great example of The Long Tail, as is eBay.

In a brick and mortar store there is a finite space for storing and showing merchandise, which leads to what Chris and others call lowest common denominator marketing. Chris uses movie theaters as an example — a movie has to attract 1500 people in a two week run to break even. This doesn’t sound like that many, but you need to remember that the average movie theater patron drives only a few miles to watch the movie. This means that in the movie market, like most others, the best product doesn’t necessarily make it to market — the one with the broadest appeal does.

The Internet destroys this model by removing the two obstacles that limit the market — overhead and geography. The removal of those obstacles creates the environment for the perfect market.

So here’s a question: what percentage of the top 100,000 titles at any online media store (Amazon, Netflix, iTunes for example) get sold or rented at least once a month?

You’ll probably guess the same number I did — between 20% and 25%. The real number is 99%. In other words, almost all of those top 100,000 titles will be bought or rented at least once per month.

Why do we guess so low? Because we’ve been conditioned to interchange the word hit with sale. Thanks to mass marketing, we believe that unless millions of something are sold they won’t make any money. This is generally true in the bricks world where there are production and distribution costs, which is why only 20 percent of major studio films are considered a hit. Same for TV shows, games, and mass-market books - 20 percent all. The odds are even worse for major-label CDs, where fewer than 10 percent are profitable, according to the Recording Industry Association of America.

As an example, Chris quotes Robbie Vann-Adibé, the CEO of Ecast, a digital jukebox company whose barroom players offer combinations of more than 150,000 tracks. I’ve seen the insides of their jukebox — it’s a PC with a monster hard drive and a great sound card.

I bolded part of what he says, because it is the essence of the Long Tail — each month, thousands of people put in their dollars for songs that no traditional jukebox anywhere has ever carried.

What Ecast, Amazon, iTunes and others have discovered is that not only do you make money on the hits, but the misses are very profitable too, because you’re selling them in a perfect market. That’s what the Long Tail is all about.

Chris also cites Rhapsody, a RealNetworks company that sells 735,000 different individual music tracks. If you look at their sales chart, the first 40,000 or so titles looks like any other retailer’s in the world (40,000 titles is about what the average bricks-based retail store carries). There’s a top selling group and then sales trail off as you go down the list.

Where the Long Tail begins is after that initial 40,000. In the bricks world, sales are strong with the most popular titles, and trail to zero as you go down the list. Then the list ends. We run out of titles because they are constrained either by overhead (it’s cost-prohibitive to stock them) or geography (the local Wal*Mart patron isn’t interested in the genre or artist past a certain point, so Wal*Mart won’t stock it.)

The Rhapsody demand keeps going. According to Chris the top 100,000 tracks streamed at least once each month, the same is true for its top 200,000, top 300,000, and top 400,000. As fast as Rhapsody adds tracks to its library, those songs find an audience, even if it’s just a few people a month, somewhere in the country.

I find this tremendously exciting. Chris sees the brilliance and opportunity in monetizing the Tail. Ebay, iTunes, Rhapsody, Amazon are examples of how it’s done.

Another great example is Google, the company that monetized the Long Tail by bringing advertising to smaller sites using AdSense and AdWords.

So what are the keys to monetizing the long tail? According to Chris they are:

1. Selection and availability - If you have no production or distribution costs then you can put together the most comprehensive catalog your niche has ever seen.

2. Low, low prices - I might have actually used the phrase perfect prices, because it doesn’t necessarily mean you need to lose money or sell at the barest minimum. It all depends on what you sell — I’ve seen items on eBay that were more expensive then I would pay at a bricks store. All that means is that in the market where they sold there was no bricks store. You just need to get to the right price for your items in your niche. In a commoditized market that will be the lowest price, though I would still pay a premium at Amazon to not have to drive twenty minutes to get to my nearest bookstore, where the selection is pretty lousy anyway.

3. Index it well - If you have a million different books or tools or car parts or chocolate covered insects you have to make it easy for people to find the one they’re looking for.This means you have to index them by name, category and whatever else people will use to find them. I also believe that suggestion selling using Collaborative Filtering (people who bought this also bought that) is a great addition to any website, provided it really works. Amazon’s can be marginal.

In short, Long Tail is where the money is !!!

Highly recommend you to read this marvellous book!!