Long Tail Economics

This blog post is inspired by a book I recently finished called The Long Tail by Chris Anderson.  For anyone that does business online, this is a fascinating read.  The book is about the economic term / phenomenon called the long tail and how it applies to the 21st century of business, specifically online business.  I want to share a few principles with you that I found useful.

When looking at a typical graph of products that sell, say, in a typical book store, you'll see a supply / demand curve like this:

Few of the products sell a lot, and a lot of the products sell a little.  The goal of the traditional retail store with its limited and expensive retail space is to fill the store with the best sellers -- those "hit" items that will sell well.  The items that don't sell a lot take up too much precious shelf space, so stores top carrying them.

However, as stores move online, the marginal costs of adding an additional product to the online store "shelf" (aka website) is dramatically less.  Online stores have the potential of selling not only just the popular items but can offer a much wider selection and can sell more niche items.  Each niche item does not sell as much as a hit item, but the collection of the sales of the niche items can make up for a large portion of the business' profits.

The Internet has helped many people who offer niche products become successful.  Niche products or niche stores are long tail items.  For example, a business that specializes in monogrammed pet bowls (something very niche and specialized) could not have been able to reach a substantial market years ago compared to what can be reached these days to the Internet.  Good search engines, directories, and the ease of connecting and communicating with others help the niche products and stores gain a wider audience.

YouTube.com is another example.  Just about anyone with a video camera, professional or amateur, can make a video and upload it to the site.  It is now available to a millions of potential viewers.  A good search function and recommendation system on the YouTube website makes it easy for people to find videos of all kinds.  Not every video on YouTube is a hit, but the far majority of videos watched on YouTube are the sum of the few, not just the hits.

Search engines of all sorts, including Google and niche ones (like Quilterblogs.com for finding quilting-related blogs) help people find the niches a lot easier than ever before.  It's easier than ever to go into business and be found.  

As I type this, my father is sitting next to me looking for a car to buy for his parents.  Where does he turn to to find a used car for sale in Utah?  KSL.com with its hundreds of cars, listed by brokers as well as those selling their cars by owner at no charge.  The selection is fantastic and the ability to filter through the large selection to find what you want is very good.  KSL.com is a great example of a long tail car classifieds site.

The rise of digital-only goods makes more sense of long tail economics.  For example, iTunes sells forty to fifty times more music tracks than a good sized record store.  They simply can hold more items to sell because the digital songs don't take up any physical space -- they're just bits stored on hard drives.  I run an online quilt pattern store that takes advantage of this same concept.  The Quilt Pattern Shoppe sells only digital copies (in the popular PDF format) of quilt patterns, bringing warehousing and shipping costs to zero.

Another neat aspect of doing business online is that you no longer technically need to ship the products yourself.  For example, the e-commerce giant Amazon.com ships only a few of the items on their online store.  Amazon is arguably the largest online store because it has such a huge selection of products -- hundreds of thousands of books, thousands of toys, food, home dec, etc.  Customers like selection because they can choose instead of having choices forced on them.  Here is the neat part: a lot of items for sale on their site are fulfilled by other supplies on demand.  Amazon doesn't warehouse those millions of products.  Amazon simply takes care of the payment and customer relationship.  Amazon contacts the supplier when an item sells and the supplier fulfills the order.  

In conclusion, the businesses that will succeed online and take advantage of the new long tail economics offered by the Internet will focus on two things. First, they will increase their selection of products because the cost to offer those items are small.  Selection interests buyers.  Secondly they will make it easy for people to find the items they want through good search functions.