Is the Long Tail Profitable?

The long tail concept is probably the main economical new trend shaped by business on the Internet. Whereas for the longest time the Pareto law was ruling most of the industries, this new idea was that blockbusters were not as important as it used to be.

Laurent Flores, CEO of CRMmetrix and owner of the customer listening blog, share with us an article from Anita Elberse an Associate Professor at Harvard Business School. It discusses the profitability of business models based on the long tail concept.

Here is a long summary of the article, which gives 4 advices to producers and 4 to retailers willing to profit from the long tail.

Advice to Producers

1. Don't radically alter blockbuster resource-allocation or product-portfolio management strategies. A few winners will still go a long way, probably even further than before. It remains to be seen whether the new media environment will indeed make many previously unprofitable niche products profitable. In my most recent correspondence with managers at Nielsen SoundScan, I learned that of the 3.9 million digital tracks sold in 2007 (the large majority for 99 cents each through Apple iTunes), an astonishing 24% sold only one copy, and 91%, 3.6 million tracks, sold fewer than 100 copies.

2. When producing niche goods for the tail end of the distribution, keep costs as low as possible. Your odds of success aren't favorable here either, and they will probably become less so. The extremely low demand for the large array of products in the tail means that simply recovering the costs of producing them will be challenging.

3. When trying to strengthen your presence in digital channels, focus on marketing your most popular products. By definition, they reach the largest number of customers, and they are also appreciated more by those who consume them.

4. Leverage your scale to improve online exposure and demand for products across your product portfolio. The long tail consists of a mixture of true niche products and old hits resulting from blockbuster-focused strategies. Such products can now live forever online, even if they have long been cleared from physical shelves; thus the old hits may present a real opportunity. Larger producers have an advantage in that they can use new releases to trigger demand for old ones, previous movies in which a cast member appeared, for example, or earlier recordings by an up-and-coming artist. Companies can benefit from finding ways to regularly remarket products in their back catalogs and from bundling old with newer products.

Advice to Retailers

1. If the goal is to cater to your heavy customers, broaden your assortment with more niche products. My research shows that even when online assortments of videos and music are enormous, and thus even the most frequent customers could easily satisfy their appetites with products in the top decile, those customers are disproportionately active in the tail. They want a wide assortment, so offering one helps attract and retain them, whether they pay by the product or for a subscription (frequent customers typically opt for more-expensive subscription plans).

2. Strictly manage the costs of offering products that will rarely sell. If possible, use online networks to construct creative models in which you incur no costs unless the customer actually initiates a transaction. Managing a large number of products that rarely or never sell could easily pose a problem. Long-tail products may offer more-attractive profit margins for retailers than hit products do, in part because the latter are often used as loss leaders. But extremely low demand for long-tail products, coupled with whatever it costs to make them available, presents difficulties in successfully executing a long-tail model.

3. Acquire and manage customers by using your most popular products. Precisely because hit products reach the greatest number of consumers and are appreciated most, their value as loss leaders in traditional channels will carry over into the digital realm. The seventh book in the Harry Potter series, introduced by Scholastic at a suggested retail price of $34.99 in the United States, was a blockbuster loss leader: It was sold at sharply reduced prices by Barnes & Noble ($20.99, a 40% discount) and Amazon ($17.99, a 49% discount) in an effort to stimulate other purchases.

Like producers, online retailers can benefit from bundling hit products with obscure or older products that are cheaper to acquire. Another, probably more common approach is to direct customers to the tail with recommendation engines. A third strategy worth considering is designing the flow of web pages so that consumers, even those searching for hit products, are naturally directed into the tail. The list of recommended titles can be manipulated, often instantly and cheaply, to spotlight higher-margin obscure items or to smooth demand for sought-after titles over time.

4. Even though obscure products may have a higher profit margin, resist the temptation to direct customers to the tail too often, or you'll risk their dissatisfaction. Finding a good marketing balance between obscure and popular products is critical. Online retailers cannot expect their customers to prefer long-tail products to hits, in fact, the opposite is more likely. They should take this into account when managing customer expectations and satisfaction, which, after all, lead to long-term profitability. The continued dominance of hit products and the natural shape of demand suggest that efforts to fatten the tail by spreading consumption more evenly across titles may be fruitless anyway.

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