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Long-tail Business: The future in Crisis?

September 23rd, 2020
Benchmarking

Long-tail Business: The future in Crisis?

September 23rd, 2020
Benchmarking

Selling less of more is a future of businesses in the crisis like the coronavirus

Today, companies are no longer constrained by physical space or the costs of reaching their market. They can now offer a large number of niche products too many individual customers. Consumers have an increasing choice and want to express their individuality by buying niche items from online sellers.

What is a long-tail theory in business?

The “Long Tail” theory challenges the basic principles of economics. In the past, successful businesses often sold high volumes of a limited number of products. Now, according to author Chris Anderson, the future of business is in selling less of more—low volumes of an increasingly large number of products.

A primary factor in today’s global economy is the Internet, which is shifting the focus from mainstream products and markets—represented by the “head” of the demand curve—toward a large number of niche or low-volume products and markets, as seen in the “tail” of the curve. A conventional demand curve is drawn with price on the vertical axis, and quantity on the horizontal axis, and demonstrates that people buy more as the price falls. Anderson represents sales on the vertical axis and the number of products on the horizontal axis, showing that growth in many industries will come from the niche end of demand—the Long Tail.

Is there any obstacle?

Remove them.

Supply was once constrained by factors such as cost of production, physical space for storage, and cost of distribution. Digital processing, online ordering, and electronic distribution have removed many of these barriers. Selling smaller numbers of a greater range of items can result in higher overall sales and profit than selling common items. Books, music, and movies are classic examples of the Long Tail theory. A traditional bookstore can only stock books that are likely to sell. Amazon, however, can list every book, even though some may never be sold. Less popular titles that are not stored in its vast warehouses can be shipped direct from a publisher to meet individual demand. Combined sales of one-ofa-kind books may be larger than that of bestsellers, and so may equal more profit. Similarly, iTunes can offer a longer list of music than any physical store, and Netflix can stream almost any film into your living room. When offered almost limitless choice, consumers exert their preferences and spend money.

Asia is a large and growing market, but it is fragmented by many different cultures. Individual countries offer numerous niche opportunities for companies that can tailor products and services by language and ethnicity, rather than offering to the mass market. Startups are recognizing the Long Tail benefits and using the region’s diversity to their advantage. One example is Brandtology, an online company that analyzes social media and online chat, in local languages, for clients in Singapore and Hong Kong. Native speakers of languages such as Mandarin, Japanese, and Korean offer social-media analysis to provide localized insights and interpretation of key issues within a particular culture.

Root of long tail theory in marketing

The “long tail” theory took shape in an article by Chris Anderson, editor of wired magazine, which grew into the 2006 book The Long Tail: Why the Future of Business Is Selling Less of More. The book’s subtitle puts the strategic implications in a nutshell. Now that consumers can find and afford products more closely tailored to their individual tastes, Anderson believes, they will migrate away from homogenized hits. The wise company, therefore, will stop relying on blockbusters and focus on the profits to be made from the long tail—niche offerings that cannot profitably be provided through brick-and-mortar channels.

Selling less of more: is it working?

To find out, Anita Elberse investigated sales patterns in the music and home-video industries—two markets that Anderson and others frequently hold up as examples of the long-tail theory in action. Specifically, she reviewed sales data obtained from Nielsen VideoScan and Nielsen SoundScan, which monitor weekly purchases of videos and music through online and off-line retailers; from Quickflix, an Australian DVD-by-mail rental service; and from Rhapsody, an online music service that allows subscribers to choose from a large database of songs for a fixed monthly fee (and which Anderson cites often in The Long Tail).

What she discovered may be of intellectual interest to readers who can relate both theories to their own consumption experience and appreciate the tension between them. But for managers whose job it is to navigate the digital landscape, the interest will be far more than academic. If you are a producer, you have pressing decisions to make about product development and marketing investments. If you are a retailer, you must decide how broad an assortment to stock and whether to guide customers toward obscure selections that may yield higher margins. In either case, your choices will vary dramatically depending on which theory you subscribe to. You won’t make the right calls unless you understand how online channels are actually changing markets.

Bottom line

Of Long-tail Business

Without question, today’s consumers have advantages that no prior generation had. Online commerce has done away with the constraints of the physical store; selections are now vast and supported by rich information. A hip-hop fan just discovering the lyrical talents of Jay-Z need not be limited to his recent hits; she can follow him all the way to his first album, Reasonable Doubt (1996), which had only modest sales, and she can easily jump to Talib Kweli and other lesser-known contemporaries, some of whom may be available only in digital format.

For Chris Anderson, the strategic implications of the digital environment seem clear. “The companies that will prosper,” he declares, “will be those that switch out of lowest-common-denominator mode and figure out how to address niches.” But her research indicates otherwise. Although no one disputes the lengthening of the tail (clearly, more obscure products are being made available for purchase every day), the tail is likely to be extremely flat and populated by titles that are mostly a diversion for consumers whose appetite for true blockbusters continues to grow. It is therefore highly disputable that much money can be made in the tail. In sales of both videos and recorded music—in many ways the perfect products to test the long-tail theory—we see that hits are and probably will remain dominant. That is the reality that should inform retailers as they struggle to offer their customers a satisfying assortment cost-efficiently. And it’s the unavoidable challenge to producers. The companies that will prosper are the ones most capable of capitalizing on individual best sellers.

How appropriate that proof of this can also be found in management literature. Over the course of 2006, Hyperion Books, which publishes adult trade fiction and nonfiction, brought dozens of original hardcovers to market. For a handful of them it spent heavily on acquisition and marketing, hoping for the profits that only blockbusters can provide. One was Mitch Albom’s novel For One More Day, which became the single best-selling hardcover of 2006. Another was a business title that had engendered an intense bidding war. Hyperion was determined to get it; New York magazine quoted an industry insider as saying that “jaws hit the floor over how much they paid.” Everyone recognized it as a high-stakes gamble in a high-risk genre. But ultimately it paid off big. It was, of course, The Long Tail.

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Source: HBR July–August 2008 Issue, DK and https://ipkitten.blogspot.com/

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