Defenestrating Thoughts from the Bivouac

A few months ago I read Chris Anderson’s The Long Tail since it was recommended by many friends. While it wasn’t the earth-shattering, flip traditional economics upside-down book as some people claimed, it still presented some new-to-me ideas. I say “new-to-me” because apparently these ideas been out there a while, and this was one of more recent renditions. When I was discussing this book with my dad, he mentioned that he heard the same concept of long tail retail presented at a conference about 20 years ago.

The long tail is the common name for the “power-law tails”. Basically, in the graph here (stolen from Wikipedia), the green part of the graph represents a group of items that have a very high amplitude, while the yellow (the long tail) represents the group of items with a low amplitude. The key here is that the frequency of the low amplitude items can, in aggregate, be greater that the head of the distribution.

Let’s use music as an example. Imagine that you graph all CDs sales by artist, a mainstream artist like Bon Jovi sells lots of albums, so he would be in the green part of the graph. A lesser known group, like Bambi’s Apartment, is part of the tail of curve, since they would have fewer sales. Anderson’s theory is that if you take all the sales of all the lesser known bands, it is more than all the sales of the popular ones.

It used to be if you wanted to buy anything you would need to go to a store. The store acts as a middle-man and “pre-filters” your choices. Since the store has only limited shelf-space, they will only stock what sells a lot. So it would be profitable for them to stock a Bon Jovi CD, since lots of people want them. For Bambi’s Apartment, it would be not as profitable, so it would not be stocked. As a result, nearly everything we brought was mass market.

Now with online commerce, much of that limitation is gone. We can find a lot more variety of products online compared to in the stores. This opens up a whole new set of the products that we didn’t have before. The old 80/20 rule says that 20% of the products account for 80% of the revenue. The items available in a store represent the “20%”. Now with online commerce, we have access to the remaining “80%”.

This change in shopping is very similar to the introduction of the Sears catalog. Around 1900, the Sears catalog was over 300 pages, offering customers far more selection and value (usually 50% cheaper) than any retail store could.

The important points with online and the old catalog sales model is that a lot of the additional costs of retail are essentially zero. Obviously there are no physical stores to build or salesmen to hire. The merchandise is shipped either direct from the manufacture or from a large central factory, so there isn’t a need for regional warehouses and a team of MBAs to manage the whole pipeline.

If your national inventory is in one central warehouse, it now becomes profitable to sell lower volume items. Suppose there was a CD that would sell 1 copy a week nationally. If you are Target there is no way you would stock this item, since you would need one in every store so that you can find that one customer. Plus this would take already limited shelf space away from an item that does would sell more. But if you are Amazon.com, you can have one CD in one of your warehouses and be able to cover any potential consumer. So selling these long tail items is now profitable.

All these barriers (retail space, middle-man overhead, etc.) represented a barrier to entry for new products. Stores wouldn’t want to take chances on something that wasn’t already proven to be successful. Now as this bottleneck between supply and demand decreases, not only do you get more sales on long tail products, but you also get demand moved from the head to the tail . This is because consumers can now buy niche products in place of mass market products. For example, in the past if you needed to buy a CD, you would need to choose from one in the store, now you can buy something else online, instead of the one in the store.

This idea also generalizes to almost all industries. The immediate examples are Amazon (retail goods), iTunes (music) and Netflix (video rental). In advertising you have Google, which provides a venue for small businesses to affordability and efficiently advertise in the online market. These businesses are in the long tail of advertising buy because the traditional print and media advertising business is too expensive and inefficient for small businesses.

So in a nutshell, that’s the idea of the Long Tail. It seems to be one of the big buzzwords right now. If you are going to be writing a mission statement, I would definitely include the words “long tail”. In fact, here’s a freebie mission statement: “Realize upward revenue stream dynamics through utilization of the long tail paradigm shift, valuing the customer, and leveraging our core competencies.” :-)

Though the book is very repetitive at times, it still presents some really important concepts and seems to be a bellwheter in the business world right now.