The Long Tail

The current issue of Wired has an article on the economics of online retail, and in particular the cost structures that come with "infinite" warehouse and shelf space.

Wait, this is a marketing blog, right? Well, this has big implications for marketing.

The thesis of the Wired article is this: physical retailers have always had to make choices about what products to carry based on those products' popularity, because of the relatively steep cost of putting a product in a store. To use their example: if you are Walmart, you are going to carry only the CDs that are going to cell a certain number of thousands of copies, because your space is a limited resource. So you will have the latest from Brittany Spears, but you will not have a disk of John Zorn interpreting the work of film compose Ennio Morricone.

If you are Amazon.com, you do not have the same limitations. Yes, you need to keep the disks in a warehouse somewhere, but your retail shelf space is infinite; you can stock all kinds of things that few people want. And because the geographic market of your store is the world, it doesn't matter if the buyers for those little-known CDs (or books or DVDs) are scattered about - whereas the person deciding what to stock at Tower Records needs to choose things that enough people within a few miles of the store will purchase.

If you are the iTunes Music Store, and your product is information downloaded across the net, it's even better. Your costs are mostly sunk costs for your site. Variable costs like transaction processing and bandwidth can be easily covered by purchases. So you might as well offer music that only a dozen people are going to buy. You'll make money on it.

So far, simple enough, and those of us who shop online retailers are accustomed to finding things that are hard to find in local stores, even in large cities, online. But the interesting finding that the article discusses is this: the assumption has always been that the blockbusters will still be where the money is. They are blockbusters for a reason: marketing support, word of mouth, and yes quality as well (even if only production quality rather than artistic quality).

That turns out to be wrong, and when you start aggregating all of those little purchases farther down in popularity (the "long tail" on a distribution of titles and sales), it turns out that sales are much stronger than anyone expected. In fact, sales of lesser-known entertainment products may actually account for more revenue than the blockbusters.

What does this mean for marketers?

• First, you need to understand both the traditional cost structures in your industry, and how they are changing (whether because of online sales, or any other factor). Changing cost structures may make niche markets where you've seen strong demand but couldn't profitably sell much more appealing.


• Second, expect more competition there. A few years ago, if you decided to rent documentary films by mail, you would not have a lot of competition. In the universe of DVD rentals, that is a relatively small niche. Today it's one that Netflix is profitably exploiting, as the Wired article notes. Expect the big guys to start moving down that long tail into specialty niches.


• Third, your online presence matters. This isn't discussed in great detail in the Wired article, but the technology that drives online purchasing makes the profits in the long tail possible. Customers have to find those products. Online merchants that not only help them find what they want, but guide them to other products in the long tail will be the winners. Amazon is a great example of this - the Wired article gives an example of a book that went from near extinction (it was about to go out of print) to solid sales because of Amazon's sophisticated recommendation system.

One of the keys to marketing success is understanding your overall market and the segments where you can be a strong player. As Wired points out this month, costs are a key part of that, and new ways of marketing and selling change the segmentation equation.