Book Analysis: The long tail. How endless choice is creating unlimited demand
In the past, economics' was dominated by vendors that sold a large quantity of only one or two items. The Internet has changed the shape of product offerings. The new economic model, first made popular by Chris Anderson in an article published in Wired magazine, examines the new economic model. This model is based on each vendor selling a large number of unique items, but only small quantities of each. As a result, the vendor sells fewer of the more popular items in large quantities. Amazon and Netflix are two of the best examples of companies that are applying this new business model. Chris Anderson explains his concept in the book: The Long Tail: Why the Future of Business is Selling Less of More. Chris Anderson is the Editor-in-Chief of Wired Magazine. The long tail economy is his most famous work to date. This research will examine this new theoretical model and compare it to traditional theoretic economic models.
The Union of Communication and Economic Theory
Why the Need For a New Model?
The first thing that one might ask is why the need to develop a new theoretical model exists in the first place. The answer to that is simple, the effects of the Internet has created changes to the economy that did not exist when traditional models were developed. The Internet changed the marketplace in ways that were unpredictable. When the idea of the Internet was first conceived, only a select few thought it would become what it is today. The Long Tail represents a new business strategy that has been applied successfully in a number of business situations. The success of this strategy has led to the development of new ways to apply it in other sectors of the market.
The long tail allows businesses to reduce distribution and inventory costs. This allows them to realize a significant profit by selling small volumes of high demand, low supply items to a large customer base. Chris Anderson introduces the concept of "non-hit" items. This term simply refers to items that are not the most popular. For instance, Amazon.com is known primarily as a bookseller. Of course, best sellers represent the most popular items. However, Amazon sells thousands of items that may not be the most popular, or that target their primary market, but they sell so many of them that it results in significant profit. Amazon is the best example of the long tail strategy. The total volume of non-hit items is larger than the volume of popular best selling novels.
The concept of the long tail is due to its ability to be applied to differing sectors of the market in a number of situations. For instance, the long tail has been applied to research, experimentation, online business, mass media, and finance. It is also found its way into social networking and marketing. It is also been known in the insurance industry for many years and is finding new applications every day.
What is the Long Tail?
This long tail is based on a concept that springs from traditional economic models, the frequency distribution with the long tail. The long tail is the name for a feature that is seen in some types of frequency distributions. There also referred to as heavy tails, fat tails, Pareto tails or power tails. They first began to be studied in the late 1940s and 1950s (Van Borm). The long tail distribution requires either a high frequency or high amplitude population. This population is followed by a low frequency or low amplitude population that trails off asymmetrically. From a statistical standpoint, those events that are located at the end of the tail have little probability of actually occur in.
The long tail distribution in the traditional market model looks like this.
Source: Van Borm, Julien. The Long Tail, Copyright and Libraries
In the traditional market, the seller concentrates on selling a high number of units of only a few products. In this model, if one divides the chart into four equal sections, it becomes apparent that mass marketing techniques only focus on about 20% of the products offered by the company. In other words, they focus on only their most popular items and practically ignore the rest. These are generally considered to be high revenue events in terms of both volume and revenues generated. Their marketing efforts and sales techniques treat those products in the long tail portion of the distribution as insignificant add ons, rather than a primary source of revenues. As one can see from the chart, these high volume best represent less than 50% of the product offerings.
On the other hand, Chris Anderson's long tailed approach to business operations concentrates on the remainder of the items in the long tail. Those located in the long tail of the frequency distribution represent low frequency, low amplitude (revenue) events. The volume in terms of chart area of the long tail events can be equal to or greater than the 20% of the events that traditional marketing chooses to concentrate on as a revenue source. Growing the tail longer can represent a larger volume than the traditional marketing model. This is essentially the core concept of the long tail model.
Let us take a look at Anderson's version of the long tail from an operations standpoint. All of the products that a vendor offers require resources. They must be stored in a warehouse at some location, they must be shipped to that location from somewhere else, and finally when they are sold they must be shipped the final purchase point. This amounts to overhead where the item sells or not. The traditional supply and distribution approach results in many items that sit in the warehouse consuming resources. The costs of these items must be supported by the 20% of the items that are sold. Essentially, the 20% of the best-selling items must make up for the overhead generated by items that are doing little more than taking up space. This results in operational inefficiency and in the long-term, adds up to losses in retained income. Any loss in revenue results in a double loss under this model. Revenue is lost by a drop in sales, yet the costs of maintaining the entire inventoried remains steady. There is nowhere to make up the operational costs of maintaining the entire inventory offering.
Using Anderson's long tail approach, as outlined in Anderson's book, the entire stock of inventory helps to pay for the operational costs of the whole. The long tail approach allows the retailer to generate sales from obscure items that are not found anywhere else. Inventory that is not in the bestseller list may not generate as much revenue as a more popular items, but they generate a little revenue. In the big picture, the best-selling items no longer have to support their own weight and the weight of lower volume items in terms of operational costs. The smaller items now support their own operational costs and do not bite into the profits of higher volume items. As one can see, this approach to operations results in a sufficient system where there is little or no waste.
Let us further examine the long tail economic concepts brought forth by Anderson. The long tail concept can best be described by example. Random House Publishing was the example used by Anderson in the original Wired article. Therefore, it will be used to explain this concept in a way that allows for its practical application. Random House offers many obscure books that are either not available and brick and mortar stores, or that are out of print. The long tail represents a potential market that is untapped using traditional models. The Internet offers many distribution and sales channels that allow businesses to efficiently adopt the long tail model.
Using the long tailed approach, sales can be extended on certain items. The following is found in Amderson's 2004 article in Wired. In 1988 a British Mountain climber wrote a book called Touching the Void. This book chronicled in near death experience by a mountain climber in the Peruvian Andes. It was written by a man named Joe Simpson. At its first release it only experienced moderate sales. As with many books that do not make the bestseller list, sales of this book soon faded to nearly nothing.
In 1998, nearly a decade later, another author, Jon Krakauer, wrote a similar book called Into Thin Air. This book was also about a mountain climbing tragedy and very similar to Simpson's book. However, this book took the publishing world by storm and became an almost overnight sensation. It may not be that the book was better written, it may simply be that the author did a better job of marketing and promotion. For whatever reason is behind the sales results, the affect is the same.