The Long Tail is written by Chris Andersen, editor of Wired magazine and a former jounalist for The Economist. He also runs the Long Tail website. It is a treatise on the changing nature of retail trade, centered on one central concept: The combined sales of modest sellers and obscure items can equal those of the biggest successes.
The Long Tail is named after the shape of the graph that demonstrates it:
The high sellers appear in the ‘head’ towards the left, with the lower sellers ‘tailing’ off to the right in a slope that never quite reaches zero: even the most obscure item will have some sales.
In conventional retailing theory, only those items near the left side of the graph should be offered, due to the high cost of retail shelf space. In the long tail model (I’m using lowercase when referrring to the long tail concept – uppercase Long Tail when describing the book), by contrast, every possible option can be carried due to the ability to reach a customer for everything on the internet. In the long tail model, companies like Amazon.com can carry millions of books in low-cost warehousing, because every single inventory item will be sought by somebody, somewhere.
Because warehouse space is far cheaper than high street shelf space, an online retailer can carry a far greater variety of product than a conventional retailer. Each item of stock held in a warehouse will have a carrying cost that is only a fraction of its counterpart on a retail shelf. In the market for digital products, like music downloads and online video, the cost of carrying stock is virtually zero. Therefore it does not matter if some items hardly ever sell, because even if they sell once, they are contributing directly to the bottom line.
Product variety is constantly growing in almost every sector of every market. Even commodity products like flour are sub-dividing into smaller sub-markets. These ever-dividing ‘niches’ are eroding the traditional business strategy of focusing on the really big sellers – the ‘hits’. They are also contributing to the growth of the tail’s share of the overall market.
Andersen describes three forces of the Long Tail:
1. Democratize the tools of production – this can be related to the economic phrase ‘lowering the barriers to entry’. He uses the example of how personal computers, the internet and blogging software have combined to enable millions of new publishers to appear. Some of publishers are individuals with a small audience (like this one!) or online publishers who started small and became big, such as tech and gadget blog Boing Boing.
2. Democratize the tools of distribution – In other words, make it easier and cheaper for producers to reach customers, and vice versa. This increases the ‘liquidity’ of the tail, which in turn increases the overall size of the market for niches.
3 Connect supply and demand – filtering elements like customer recommendations on music sites, opinions of bloggers, and (ironically) best-seller lists aid the spread of knowledge about the market, increasing the potential number of buyers for every niche product.
The Long Tail takes many of the best known online companies as examples of the concept at work: Ebay is an aggregator, putting buyers and sellers together without ever holding stock of its own; Google’s AdWords system uses algorithms to match many thousands of advertisers with sellers of advertising space (webmasters), Amazon.com has a merchant program where smaller sellers of niche products can have their products listed on Amazon, who do not have to carry the stock that is being offfered.
The book makes the important point that the long tail of the market will not replace the head; both can and will continue to exist alongside each other, but those who produce can no longer assume that the head will remain as large. Increased exposure to the tail may increase overall demand, but this is more likely to raise the tail than the head.
The Long Tail and Mass Customization – Opposites or Just Opposite Sides of the Coin?
Given the focus of this website, it is worth noting that The Long Tail is not a book on mass customization. It does provide examples of mass customization as evidence of the growing power of the tail, but it is principally about leveraging the potential of massive product variety.
The long tail concept presumes that the product is available – sometimes on a build-to-order basis, but more often from stocks already held. This aspect of the long tail idea is at odds with the mass customization idea, which presumes little or no finished stock inventory, with products being made only after they are sold.
However, some aspects of the long tail relate closely to mass customization. Among the factors influencing the growth of the long tail is less homogenous markets, which was also cited by B. Joseph Pine as a contributing factor to the development of mass customization, in his landmark 1993 book Mass Customization – The New Frontier in Business Competition. Also, the constantly increasing levels of product variety were also noted by W. Michael Cox and Richard Alm, in ‘The Right Stuff: America’s Move to Mass Customization’, part of the Federal Reserve Bank of Texas 1998 Annual report.
The growth of more ‘democratic’ markets is also shared between mass customization and the long tail. One example is the growth of peer production, where individual members of a large group propose new products (such as new music, lego toys or t-shirt designs), which are then rated by their peers within the group. The most successful are then made available to the open market. This displays characteristics of both the long tail and mass customization.
Also, the growth of the long tail make build-to-order more feasible in many markets. Lulu.com can publish a book for you and print copies in tiny numbers to fill orders on-demand.
Critically, the issues of choice that affect mass customization markets also affect the long tail. Andersen looks in detail at the risk of creating confusion by massive choice, a topic that has also been studied extensively by researchers into mass customization. Similar to mass customization, Andersen concludes that a well-contructed guiding process is essential for long tail environments.
Keeping the accountants happy
While in some markets, such as digital music, the cost of carrying stock is practically zero, any market for goods made of matter will involve carrying costs for stock. And while the cost of carrying stock may be far less for an online retailer using warehouses, it is not zero. And unless you are an aggregator, matching buyers and sellers without holding stock directly, targeting the long tail of the market will often involve holding large inventories of stock. This means having large amounts of working capital tied up, which is generally viewed unfavourably as a business strategy. This is probably the biggest challenge to the acceptance of the long tail model among businesses. Some enterprises might be able to develop super-efficient supply chains that minimize the stock levels at any one time. However, this is more difficult for online retailers than it is for online manufacturers.
Rather than encouraging online retailers to expand their own range of available products, The Long Tail may instead encourage more of them to become aggregators for other smaller sellers.
The Long Tail book is well worth reading. Depending on the extent to which you follow developments in online business, the descriptions of online retailers’ business models may or may not be new to you. However, they are presented in a way that illustrates well how the long tail concept has grown with the World Wide Web.
At the end of the book there is a short piece on digital manufacturing, which is sometimes called 3D printing. Andersen rightly states that if digital manufacturing can be developed to output more complex products, then almost every market will become a digital market. In the same way that online music can be downloaded now, someday the design for pretty much anything else might be downloaded someday and manufactured at home. (An earlier article on this site looks at this issue in more detail.) Then every market will be a long tail market, and the cost of carrying infinite variety of stock will be zero for everything.
If digital manufacturing becomes widespread, then many more industries would become ‘knowledge industries’. One quote from the book, which was new to me, struck a chord and made me wonder about what potential is out there for new economic models based on long tail markets, mass customization and peer production. Thomas Jefferson, who developed the U.S. patent system, said:
“He who receive an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.”
It is worth considering how this quote could be used as the basis for imaginative business models in the age of the long tail and mass customization. But that discussion is for another day…..
Footnote/disclosure: On the Long Tail website, Chris Andersen offered free advance copies of the Long Tail book to bloggers who would write a review of it. I got one of those copies, and this post is keeping the bargain.
The Long Tail: Hyperion Books ISBN 1-4013-0237-8.