The Long and Short of the Tail

Online retailing and the digitization of information goods have changed the commercial environment: Virtual shelf space is infinite, consumers can search through endless options, and the marginal cost of reproducing and distributing products is now low.

These conclusions come from “The Long Tail: Why the Future of Business Is Selling Less of More”, authored by Chris Anderson, editor of Wired magazine.  He argues that the sudden availability of niche offerings more closely tailored to consumer's tastes will lure them away from homogenized hits. The “tail” of the sales distribution curve, he says, will become longer, fatter, and more profitable.

Chris Anderson says that there’s money to be made in the long tail of niche offerings. It’s called the “long tail” because “there is high demand for a small number of hits or blockbusters, but the demand for niche offerings tails off in a long flat curve — hence the term “long tail.”

In the diagram below, their sales volume ranks all possible offerings in an imagined product sector, with the shaded part representing products that are unprofitable through normal brick-and-mortar channels. The long tail, in other words, reveals a previously untapped demand.

Chris Anderson puts forth two unique and related ideas.

The first is that merchandise assortments are growing because goods don’t have to be displayed on store shelves as physical and cost constraints on selection disappear on the Internet.

Anderson’s second idea is that online channels actually change the shape of the demand curve because “consumers value niche products geared to their particular interests more than they value products designed for mass appeal. As Internet retailing enables them to find more of the former, their purchasing will change accordingly. In other words, the tail will steadily grow not only longer, as more obscure products are made available, but also fatter, as consumers discover products better suited to their tastes.”

He predicts that “fickle customers” will “scatter to the winds” as markets fragment into countless niches.”  A lot of small sales put together can add up to something big.

Anita Elberse, a professor at Harvard Business School, reviewed sales data from the music and home-video industries – two markets Mr. Anderson and others frequently quote as examples.  She set out to investigate whether Anderson’s long-tail theory is actually playing out in today’s markets.

What she found may surprise you: Blockbusters are capturing even more of the market than they used to, and consumers in the tail don’t really like niche products much.   Based on her research of two markets, she says Anderson is wrong and “there is more money to be made in a few blockbusters or hits, than in niche offerings.”

Elberse may be right when it comes to large corporations. But when you view it from the perspective of small and medium-sized businesses [SMEs], the answer is: Anderson’s long tail still makes perfect sense as an online product and market strategy for many small businesses.

Here’s the key:  SMEs do not have millions to invest. Small businesses have an inestimably small chance of ever creating a smash hit. So the chartbuster option really isn’t an option for 99.9999% of small businesses anyway.

No, many small business owners are forced to live in the niches if they want to build a business on the Internet.

Steve King of Small Biz Labs’ research shows that the long tail is happening and the number of niches able to support small businesses … is rapidly increasing. The two main drivers of this are combining to shift demand curves and create many new niche opportunities - for both digital and physical goods:

“1.  Reductions in the cost of doing business in many niche markets. Technology, outsourcing and access to third-party services are making it easier and cheaper to create online niche or highly customized products and services.

2.  The Internet has made it cheaper and easier for buyers and sellers of niche products and services to find one another. This means the producers of niche products can cost effectively attract enough customers to create viable niche businesses.”

For small businesses marketing online, the long tail and niches may be just where SMEs need to be. In fact, they may be the only place they can afford to be.