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The Long Tail strategy: Myth or money maker?

11/02/2006

What do a heart-shaped potato chip, an imperial of Screaming Eagle, a bottle of 1992 Cabernet, and a downloaded copy of the Four Season’s live version of “Oh What a Night” have in common? While individually, these may be lowdemand items, viewed collectively with millions of other commodities, each has found its way into mainstream market planning. This phenomenon makes all three of them a part of the “Long Tail” business planning strategy.

What is the Long Tail, you may ask? The term “Long Tail” comes from statistical XY distribution graphs in which popularity is correlated to inventory in the marketplace. The elevated front part of the graph is the Short Head and the seemingly endless low-volume component is the Long Tail. Long Tail business strategies operate under the axiom that the profits from selling a wide variety of niche products will (at some point) exceed the revenue of selling a few high-volume products.

Experts debate the value of Long Tail theories. The phenomenon first became popular in a 2004 Wired magazine article by Chris Anderson. Anderson fur- ther develops the theory in his 2006 New York Times bestselling book, The Long Tail: Why the Future of Business Is Selling Less of More.

The Long Tail concept is often associated with distribution businesses such as Amazon.com, Netflix, and Rhapsody. A key feature of these businesses is that each serves as a one-stop shop for millions of products. In addition to selling popular items, these companies have developed a catalog of low-volume items that greatly contribute to their revenue streams.

Skeptics point out that the Long Tail has yet to emerge as a viable mass market business strategy. . . . The jury is still out on its long-term potential.

Effective inventory management is key

Inventory management is vital to sustaining a Long Tail business model. A successful Long Tail company will own or have access to a massive variety of different items. Given a random pattern of Long Tail activity, an aggregator must have a substantial collection of single items to satisfy the market demands of the indefinite future. Rhapsody, for example, carries more than 1.5 million song tracks in its downloadable library. Its business model operates on the assumption that while not one of its tracks will be downloaded more than 1.5 million times in a given year, each of the 1.5 million tracks will be downloaded at least once.

For Rhapsody, the hook is its wide variety of music, not the dependency on one track’s popular appeal. When dealing with large inventories, the low storage and distribution costs correlate directly to the profitability of Long Tail sales. This is why Long Tail business successes are seen mainly in downloadable electronic products such as software, music, and movies.

Centralized services

Companies like Amazon.com and eBay have been able to overcome physical inventory costs by serving as pass-through distributors, and drawing from inventories of multiple suppliers. Both companies leverage Long Tail sales through central ordering systems and decentralized supply chains. Amazon.com collects orders, then forwards them to more specialized commercial suppliers that can drop-ship the items as directed. eBay operates the primary ordering system used by commercial and private buyers and sellers. Each of these companies has successfully capitalized on the eclectic tastes of the Long Tail market.

The Long Tail’s success story is poised to transcend music downloads and aggregator Web sites. As the Internet becomes more accessible and efficient, so too do Long Tail businesses. Proponents foresee an Internet marketplace where consumers may shop direct for every product imaginable. If telecom and media industries can overcome pervasive bandwidth issues, the Long Tail theory suggests that the broad collection of individual Web sites that offer movies, clips, and advertising could supplant large network revenues driven by more limited “popular” programming. Given the choice between accessing limited amounts of programming at designated times and platforms, versus downloading or streaming any type of content at any time and on any device, consumers are already migrating toward the latter Long Tail entertainment options.

Is the Long Tail viable?

The Long Tail is not without criticism. Skeptics point out that the Long Tail has not emerged as a viable mass-market strategy. This is due to the fact that it is, thus far, applicable only to a handful of perfectly suited industries. The Long Tail has very little appeal to the oil or pharmaceutical industries, for example, which feature high development/processing costs and the need for product uniformity. For this reason, it is argued that the Long Tail is merely a way of creating a broad economic category for random purchasing activities.

Another argument challenging the viability of the Long Tail is in the costs of creating content. Virtually all successful Long Tail models aggregate or market products that have previously been created. For music, the Long Tail market is comprised of millions of tracks spanning decades of production. The Long Tail business plan does little to address the costs of producing new material to be downloaded only once or twice a month indefinitely. While profits may be distributed along the Long Tail, there is no corollary model for distributing high production costs in the same way. In essence, the Long Tail needs a short head of popular products generating enough short-term profit to encourage new production.

Does Long Tail analysis fit?

When evaluating business strategies, analyzing investments, or developing marketing strategies, you may want to consider whether Long Tail analysis makes sense for you. In examining Long Tail investment or business strategies, there are five key factors to consider:

  1. What are the costs of inventory and distribution for the proposed business model?
  2. Is the company able to leverage/access/sell a large selection of different products?
  3. Does the company have a strategy for attracting a variety of people to its central order point/Web site?
  4. How long can the company be sustained by minimal purchases on its Long Tail?
  5. What is the company’s strategy for growth/ capacity and integrating new products/material?

Despite challenges associated with implementing a Long Tail business plan, companies that have well-planned strategies may successfully gain revenues through diverse product offerings. You may contact jill.greene@moyewhite.com for more information on this topic.

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