A really Great article from Anita Elberse an Associate Professor at Harvard Business School. In her well documented and data full article, Dr. Elberse calls the attention on the real value of the so call "Long Tail", and really questions with accurate data the real "profitable" business opportunity that the long tail offers... Below a few paragraphs that provide key take out and recommendations for both retailers and producers... (to get the full article go the Harvard Business Review website ).
Implications for Strategy
Soon after The Long Tail was published, BusinessWeek declared that Chris Anderson's theory was the biggest idea of the year. The book was widely read, and its title entered the management vernacular. Anderson has spoken to numerous management audiences about its implications. All this has had an impact on practice: The long-tail theory increasingly influences the development and appraisal of business models, particularly in the media and entertainment sector.
It is undeniable that online commerce has significantly broadened customers' access to products of all varieties, including the most obscure. However, my findings suggest that it would be imprudent for companies to upend traditional practice and focus on the demand for obscure products. The data show how difficult it is to profit from the tail. What, then, are the implications of my research for practice? I have four recommendations for producers of media and entertainment goods, and four for online retailers or content aggregators seeking to profit from long-tail demand. Although my research has focused on media content and information goods, these recommendations probably apply to physical goods as well. In fact, their payoff for manufacturers and retailers of physical goods might be bigger, because of the higher production costs involved.
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.
My research suggests that the tail is long and flat, and therefore that content providers will find it hard to profit much from it. It remains to be seen whether the new media environment will indeed make many previously unprofitable niche products profitable. Online channels lower the barriers to market entry for such products, and thus introduce the possibility of additional sales, but they also lead to a flood of products all competing for consumers' attention. 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. Although increased concentration of sales may make it tougher to turn a focus on blockbusters into a winning strategy, no effective alternative strategy is readily available.
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. Given that obscure products tend to be appreciated less than hits, it will be very difficult to earn any kind of price premium for them.
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. This insight is perhaps particularly relevant for content providers competing in advertising-supported markets. Advertisers hoping to reach a broad cross-section of consumers in a world of proliferating media are better off placing ads around popular products; not only will their messages be seen more often, but, because those products are generally liked better, they will be seen in a favorable context. Hit products may therefore have a disproportionately high value. No wonder, then, that large media companies increasingly insist on more control over pricing and bundling decisions involving their most popular offerings. NBC's recent spat with iTunes is one example.
4. Leverage your scale to improve online exposure and demand for products across your product portfolio. Again, hit products play a key role here.
The long tail consists of a mixture of true niche products (which, by Anderson's definition, do not meet the bar for traditional distribution) 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. The caveat here, again, is that the benefits may not outweigh the costs. Music companies, for instance, often decline to make old content available online because clearing the rights is too cumbersome. Similarly, although channel partnerships frequently prevent companies from leveraging their scale (Apple's iTunes often gives relatively more promotional space to artists from independent record labels than to those from the majors, for instance), companies can use their hit products to negotiate better terms with channel partners. Larger, better-established firms with strong pipelines should therefore benefit more than smaller companies from any increased demand in online channels.
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.
Making "onesies" and "twosies" profitable may require completely eliminating any associated costs. It is therefore worthwhile to explore creative solutions for the very end of the tail. One example is Amazon's Marketplace, in which third parties pay to communicate a title's availability, and Amazon incurs costs only when a customer actually places an order. Another is having volunteers create, adapt, and manage information in web businesses. Just imagine if Wikipedia paid authors for every page created. Even if the fee were nominal, Wikipedia would probably lose a substantial sum on its least visited pages.
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.
Who Will Prosper?
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 my 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.
Copyright 2008 Harvard Business School Publishing All Rights Reserved
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