As discussed in earlier posts; companies in the leisure branch nowadays should either grow big or choose a niche in order to survive. (ING,2018) The companies that choose to work in a niche have several options of positioning and promoting themselves. In this post will I discuss a theory based on the niche marketing; long tail. How does the long tail work and how does it affect leisure branch?
The long tail; how technology turns mass markets into millions of niches
The long tail theory is devised by Chris Anderson, curator of TEDx. He states that growing catalogus of items, search and recommendation tools allow customers to find the right products. Due to e-commerce will the demand curve change, because people like personalized offers better than mass products. The influence of niche markets on profit is increasing, therefore is it important to focus on these markets. The curve will not only get longer but also thicker. Chris Anderson took particularly the music and film industry to explain the long tail theory, therefore are the examples music and film industry related.
The three forces of the long tail; feasibility, availability and findability
In short, the theory of the long tail is the following: through culture and economy the focus shifts to a relatively small number of hits (mainstream products and markets) on the up of the demand curve to a huge number of niches in the tail. Specific goods are economically just as attractive as the mainstream.
How do long tails develop?
- The democratization of means of production. The ability to create something for everyone is bigger, as a result of which the tail on the right becomes longer and the quantity of goods increases explosively.
- Lower consumption costs through democratization of distribution. Through the internet people can be reached cheaper, which increases the liquidity of the market in the tail. This ensures more consistency, which makes the tail thicker.
- Matching supply and demand. The demand changes from hits to niches. For people who are looking for something new, it is very easy to get information that increases demand in the niches. The third force ensures that the center of gravity shifts to the right.
The new producers; never underestimate the power of countless amateurs with access to the factory!
There is a rise of the ‘pro-ams’ era in which professionals and amateurs work shoulder to shoulder. There are limits what the ‘pro-ams’ can do. They mainly collect data, but theories do not come up with them. There will always remain a division of labor between professionals and amateurs, but in the future it becomes more difficult to distinguish. ‘Pro-ams’ are a creation of the first force of the long tail. There is consumerism towards participatory ‘producerism’: At Apple everyone can make apps and sell in the store. Wikipedia is also an example of ‘pro-ams’. The production means are available to everyone, making everyone a producer. The long tail promises a place of creativity where ideas can emerge and grow.
Long tail strategies
- Thick head → doing what you are good at. Users are asked to participate, for example in a singing contest like ‘The Voice of Holland’.
- Thick tail → communities and interactions between professionals and amateurs who talk to each other and share knowledge. So called ‘pro-ams’.
- Long tail → using every niche to get a bit money, which together forms a reasonable percentage of money. YouTube is a great example.
In the Netherlands we now mainly operate in the thick head and the long tail. The user generated content (long tail) is declining in popularity and we are carefully moving to the tipping point. The tipping point represents the platforms where professional and lovers of an particular niche meet and interact with each other. If you know how to create the circumstances to become an tipping point, you will have advantages over other companies
The new markets; how does an aggregator that works from top to tail work?
A long tail aggregator is a company or service that collects a large amount of goods and makes it easy to find, usually in one place. This lowers the threshold to the market and it is a manifestation of the 2nd force. You have 5 categories of business aggregators:
- Physical goods (Amazon, eBay) — hybrid shop, cross between physical and digital
- Digital goods (iTunes, iFilm) — digital shop, digital only with no storage costs
- Advertising / services (Google, Craigslist)
- Information / user-created content (Google, Wikipedia)
- Communities / people (MySpace, Facebook, Bloglines)
For some markets there is no trading after a certain point because there is not enough storage capacity or the costs are too high to keep trading. This is only the case with physical goods and hybrid (half digital half physical).
Hybrid stores such as Amazon often stop offering after a certain point because the costs of storing the book would be higher than the proceeds. There is, however, a solution to this problem which makes hybrid stores even closer to economic infinity. Various options for reducing costs:
- Centralized distribution combined with direct purchase from a catalog on the internet. Printing costs, and delivery of catalogs fell away.
- Reduction of the storage risk by, for example, allowing the author of books to pay for storage costs in a warehouse.
- Sell the ‘hits’ via these online catalogs.
- No longer have an assortment, but as soon as a book is ordered, for example, this book is printed (print-on-demand). No more storage costs.
- Disabling physical assortment. For example via the PS3 store you can buy online games. The company therefore does not have to store anything in terms of CDs and also no shipping. This is the ultimate cost saving.
Long-tail models are always cost driven. This can be reduced by being cost efficient and the help of the user. The user usually helps reducing the cost or increasing the joy of the product. You could think of; ratings, delivering content, social bookmarks or marketing content.
The new trendsetters; the ants have megaphones, what do they say?
The long tail would for the most part consist of noise without good filters. Filters are like the navigation of the consumer to what he or she wants. For example, if you play a certain song on Spotify, you will automatically get a list of songs that you probably like. Because thousands of other people who listened to your song also listened to these other songs. Because of this kind of filters the long tail is not a haystack and you will find what you are looking for. Thus, the market of the hits is divided into thousands of niches.
Not every top ten is created equal
What is also central is that selected top ten lists that are often given
do not make sense. For example, if we like alternative rock and in the top ten hits at that moment only one such number is actually worthwhile. That person is a lot more interested to a specific top ten of alternative rock songs, selected by someone that knows the the alternative rock scene.
Filter before and after
The products are filtered beforehand by means of talent scouts and marketing teams they try to determine what becomes a hit and what does not. In retrospect, the consumer filters and by programs like Rapsody are you looking for what hits are for you. Due to the emergence of the long tail, however, filtering is becoming less and less important because nowadays all publishing music is published anyway there is a market for all music. Large labels still filter, however, because they make too much costs and the risk can not assume that something will not be a hit.
Pareto’s principle versus long tail
The Pareto’s Principle, named after economist Vilfredo Pareto, specifies that 80 percent of consequences come from 20 percent of the causes, or an unequal relationship between inputs and outputs. This principle serves as a general reminder that the relationship between inputs and outputs is not balanced. The Pareto Principle is also known as the Pareto Rule or the 80/20 rule.
Chris Anderson, however, claimed that the long tail theory may mean the end of the 80/20 rule. Often because people can now consume much more targetedly according to their specific needs. People therefore buy less of the hits (the 20 percent of the rule) and more of the niches formed according to their ideals (the other products that are in the tail).
Long tail of time
Furthermore, the longtail of time is discussed, in short, it means that hits are only temporary. The hits of today are the niches of tomorrow, so hits contribute to the niches. Both time and attraction determine what today’s hits are.
The paradise of choice
The era of unprecedented choice has arrived, which is good according to Chris Anderson. The question is whether the enormous increase in choice that the long tail entails is positive or negative. The answer varies depending on the environment and to what extent customers are helped with their choices. When the consumer bought their products offline were they limited in information, variation and accessibility. The consumer has much more grip online. There are endless techniques to bring information to a marketplace and thereby facilitate the selection process.
The question arises: is more choice equal to more consumption? The answer to that question in general is; yes. The only condition is that the consumer gets a good ‘guidance’ in his choice. As an example; on bol.com under the chosen products another beam with products appears that other people in combination with the product bought, this encourages more consumption.
People’s interests shift from mass to specific. This shift does not mean the end of the current power culture. A new balance simply arises because the ‘or-era’ of hits or niches changes into an ‘and-era’. Our culture is increasingly a mix of top, tail, hits and niches.
Fragmentation better or worse?
Chris Anderson thinks it’s better. Despite the fact that some researchers say that the continuous growth of fragmentation will ultimately suffer to the end of a society and will only create individual worlds. Anderson thinks that this fragmentation will lead to more contacts but with people who have the same interests as you. He says that we are not fragmenting ourselves, but that we are re-shaping ourselves along other dimensions.
The rules of the long tail; How does a consumer’s paradise arise?
The secret of a thriving long tail organization lies in two necessities;
- Make sure everything is available
- Make it discoverable
Furthermore there are 9 rules that are essential for a long tail company:
Rule 1: Get the assortment inside …. Or leave it aside
Rule 2: Let customers do the job
Rule 3: One way of distributing is not enough
Rule 4: One product variant is not enough
Rule 5: One price is not enough
Rule 6: Sharing information
Rule 7: Think ‘and’ not ‘or’
Rule 8: Trust the market
Rule 9: Recognize the importance of offering ‘free’ stuff
Critics towards the theory
The Dutch Harvard Business School professor Anita Elberse claims that there is still more money earned with a big hit instead of multiple niche products. She studied the long tail theory for years, specifically the music and film industry.
She states that there is no shift from blockbusters to niche. The consumers that are actively already into the blockbusters want to further discover the niche. The blockbusters remain popular, keep on promoting them like that as well. The tail does not get thicker and longer but only longer. Occasional users stay at the blockbusters and don’t work with the niches.
Technical and economical preconditions for running a long tail business model
- The costs of content should be minimalized (possible with UGC & archive)
- Efficiently running your business partners. Long tail means a lot of partners, make sure you don’t spend to much time and money on maintaining these relationships.
- The store, lock, sell and distribute processes should be standardized as much as possible.
- Efficient marketing of niches is only possible with recommendations mechanism. Make use of the ‘People who liked this bought this as well’ principle as they use at Amazon. Also; ‘word of mouth’ marketing.
- Have sufficient scale. Meaning; sufficient products and sufficient customers.
Recommendations and operation tips
For entrepreneurs and distributors
- To attract the biggest consumers, you have to maximize the size of your portfolio. The most active consumers are the ones that will look for niche offerings. But don’t change your portfolio and strategy radically, it takes time for people to accept change.
- Minimize the costs linked to the niche product. When possible, build business models that allow you not to bear the storage and the shipping costs for these products.
- Attract your consumers with blockbusters.
- Even if you have high margin on niche product, don’t excessively redirect consumers to these products to avoid frustrations. Average satisfaction is higher for blockbusters, for almost all consumers any time.
Be aware that the tail is not static. Products and services can move within the tail. The products that might be niche today could be a blockbuster in a few year. It requires courage, customer knowledge, market knowledge and an eye for gaps in the market to move a niche product into a blockbuster.