Chapter 28

Long Tail

The pattern

The Long Tail business model concentrates on selling small quantities of a very large range of products, in contrast to a ‘blockbuster’ model (WHAT?) offering large quantities of a small range. Although Long Tail offers narrower margins and lower volume sales of individual products, profits are significant over the wide range sold in the long run (VALUE?). The Long Tail pattern disregards the classic 80–20 rule, whereby a company generally earns 80 per cent of its profits from the sale of just 20 per cent of its products. With this model, mass and niche products can generate equal shares in revenue, and in some extreme cases niche products can even bring in a larger share of the revenue than mass products (VALUE?). This model enables a company selling niche products to differentiate itself from those offering blockbuster products and to tap into an alternative source of revenue (VALUE?). The Long Tail pattern gives customers the distinct advantage of being able to browse among a much broader, more vibrant range, and increases their chances of finding products that satisfy their individual needs (WHAT?).

In order to succeed with the Long Tail model, a company needs to be capable of handling distribution costs efficiently. More specifically, the cost of selling a niche product must not be substantially greater than that of selling a blockbuster product (HOW?). In addition, customers must be able to find these niche products without incurring considerable search costs. Smart search and recommendation systems proposing products to customers based on their past searches and purchases can be instrumental in helping customers find the right niche products without difficulty (HOW?). Another way to reduce search costs is to allow customers to design products themselves (HOW?). This concept is applied in the Mass Customisation (#30) and User Design (#54) business models, which allow customers to modify products or even create them from scratch to suit their personal needs.

The origins

The Long Tail business model, first described in 2006 by Chris Anderson, editor-in-chief of Wired magazine, benefited enormously from the Internet. At last, companies were no longer tied down by restrictions such as physical distance or an absolute need for bricks-and-mortar stores. This development opened up important new sales opportunities for niche products. For its part, Digitalisation has enabled companies to store products in ‘digital warehouses’ for next to nothing. Products, and especially niche products, could now be distributed far more cost-efficiently than was the case even 20 years ago.

Online retailer Amazon, founded in 1994, and auction site eBay, founded a year later, were two of the Long Tail pioneers. According to some estimates, Amazon generates 40 per cent of its revenue by way of books that are not available from traditional booksellers. For Amazon, this Long Tail of niche products is not just a valuable revenue stream, it is also an important way for it to differentiate itself from the conventional book trade. On eBay, private individuals create a Long Tail by putting items up for auction. A total of several million auctions take place on eBay every day. Some of the more eccentric niche products available for auction there include Pope Benedict XVI’s Volkswagen Golf and a lunch date with Warren Buffett!

Long Tail: management of complexity as a prerequisite

The innovators

As the Internet continued its rapid expansion, several other innovators followed Amazon’s and eBay’s suit. The rapid expansion of the streaming service Netflix, for instance, brought the Long Tail concept to video rentals. Netflix customers have access to over 100,000 films, television series and shows – about a hundred times the number of titles available from a traditional video rental store. By virtue of its uniquely wide offer, Netflix has largely effaced conventional video rental shops. With over 150 million users, Netflix is an over-achiever in its industry by any standards.

The Long Tail business model has also found application in the banking industry. To be competitive, some financial service companies have started to target niche markets that enable them to reach an increasing number of customers. The most significant shift in the banking business model based on the Long Tail pattern has come from various new forms of commercialising microfinance. The aim of microfinance is to offer very small credits to lower-class and financially constrained people, who would otherwise have been ignored by the traditional banking business. For example, Grameen Bank in Bangladesh has successfully followed this business model. The bank has reversed conventional banking practices by removing the need for collateral and created a banking system based on mutual trust, accountability and participation. The bank is convinced that credit is a cost-effective weapon to fight poverty, and that financing millions of impoverished people can boost the development of emerging markets. As of December 2018, Grameen Bank has had 9.08 million members, 97 per cent of whom are women. With 2,568 branches, it provides services in 81,677 villages, covering more than 93 per cent of the total villages in Bangladesh.

YouTube is a further example of the Long Tail pattern. Founded in the United States in 2005, YouTube is the largest online video-sharing website in the world. YouTube operates as a subsidiary of Google, which bought it for US $1.65 billion in 2006. Both professional and non-professional users can upload and share a wide variety of content, including personal videos, film and television clips, shorts, educational films and video blogs at no cost and with relatively few limitations. Low costs of storage open the way to a massive variety of content. A search engine and a browsing directory enable rapid access to the millions of video clips that can be played on YouTube or shared by embedding them on other websites and social media platforms.

When and how to apply Long Tail

You may think that offering everything under the sun would make life easier for you and help you avoid having to make a decision about which products to focus on. But, in point of fact, too many mature companies are floundering in competition because of their inability to apply themselves to a few core products and competencies. If, however, you do manage to usefully apply your knowledge of complexity – products, technologies and markets – and are able to keep complexity costs below those of your competitors, then the Long Tail pattern is full of promise for you. This is especially true if you deal with highly specialised or individualised offerings.