The Long Tail Business Model works by selling a wide variety of niche products, which individually sell very little, but which in total generate high sales volume.
Nowadays, search engines have made it possible to consumers find anything they want all over the world, no matter how specific their interests and tastes are. At the same time, online targeted media have made it easier for a niche business to have access to their own consumers, through demographic and behavior filters.
Before the internet and the world wide web, this connection was so much more difficult, thus the sale of niche goods was not interesting for companies, let it aside.
But, as soon as the internet became a strong and profitable sales tool, this reality has changed, and these niche products have been able to develop a new kind of business model: the long tail one.
But what exactly is this Long Tail Business Model?
What is the Long Tail?
To make it possible to understand the concept of long tail more clearly, let’s look at the common retail model. In general, businesses focus on marketing and selling a reduced number of profitable popular items. So, they make money by selling large volumes of a few items.
The long tail business model does the opposite. It focuses on selling large numbers of unique items, niche products. These businesses don’t have a superstar bestselling product. They have several hard-to-find items, for different niche consumers.
The long tail phrase was coined by Chris Anderson, a British-American writer and former editor of Wired Magazine, in 2004. He highlighted that, when a store has a large distribution channel, it can market low demand products, which can collectively make up market share.
Anderson gave this name to this business model, based on the curve that this type of economy draws on a graph. Our current purchasing culture is increasingly moving away from traditional products and markets (beginning of the curve) to a demand for several different products along the curve (forming a long tail).
According to Anderson, traditional products reach a large number of sales at the beginning, but at very high initial costs. Long-tail products, on the other hand, remain on the market for long periods, at low distribution and production costs. This long tail economy is facilitated through the internet, as mentioned above, where both costumers and businesses can find each other, no matter where they physically are.
Especially when it comes to online products, that don’t demand a huge physical storage space, making the costs of customer acquisition, production and distribution fall substantially.
eBay is a famous example of long tail business because the platform has sellers marketing small quantities of specific items to buyers looking for niche products.
Long Tail Profitability
The long tail profitability is strictly related to the reduced marketing and distribution costs, as well as to the fact that there is a large share of the population who looks for niche items, opposing to the one looking for mainstream goods. Take a look at the typical long tail features:
This is perhaps the main point of the long tail business model. The current economy, especially with the advent of the internet, has made it possible to centralize warehouses, instead of having large retail chains. So, the costs of stocking are reduced.
If we think about online products, which don’t need physical space (at most, some server, if necessary), then storage costs can be zero.
And the same is true about distribution and logistics. Fewer stores and fewer facilities mean fewer expenses. Again, when it comes to online products, nearly zero costs, with a nearly infinite scale.
And how about marketing? First, web and mobile shops are able to display huge amounts of products. In addition, the business may invest money in advertising, knowing that this investment is targeting its proper audience.
Massive crowd contribution
We can think of Google as a community of individuals and companies who contribute to a huge database, creating and linking content on the web. That’s the way consumers are able to find whatever they are looking for.
Based on deep customer intelligence, engines collect data to reinforce recommendations and product development.
The recommendation engines can offer niche undiscovered products, which fit the customer preferences, instead of offering all the people the same hit items. This can be applied, for example, when retailers recommend other purchases, based on what the customer bought – or consumed when it comes to media.
It also works well regarding product development. According to people’s interests, producers and manufacturers can develop goods targeting different niche audiences. That’s why Amazon, for example, has launched its own label, and how Netflix has been creating new content.
Long Tail Key Takeaways
- Search and recommendation engines have allowed consumers to find specific products;
- Niche products can be found and accessed wherever they may be;
- Customers can discover products they have never thought available;
- Inventory, logistics, and warehousing costs are reduced;
- Competition is lowered, due to its scattered market business;
- Online products are especially benefited in this economy.
Long tail business model has provided a real shift in the economy. While, in the past, blockbuster products would account for approximately 80% of the sales, recently, they have represented less than 50%, which shows that long tail products have been increasing market share.
In order to make this business model work, the company and the entrepreneur just have to question themselves from start: does my business take advantage of a wide and spread distribution?