See also: Leverage Customer Data, Mass Customization, Open Business Model
|Key Partners||Key Activities||Value Propositions||Customer Relationships||Customer Segments|
|Cost Structures||Revenue Streams|
How: Sell a large range of less popular niche goods, which are each in lower demand and competition than mainstream blockbusters.
Why: Niche products often come with higher profitability than mainstream products as consumers navigate away from mainstream markets. Seeing niche products as a comprehensive whole could rival the demand for mainstream goods.
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The Long Tail business model is a distribution strategy that focuses on selling small quantities of a wide range of products, rather than large quantities of a limited selection. This approach is in contrast to the “blockbuster” model, which relies on high volume sales of a small number of popular items.
In contrast to the traditional 80-20 rule, where a company typically earns 80% of its profits from just 20% of its products, the Long Tail pattern allows for mass and niche products to generate equal shares in revenue. In some cases, niche products may even bring in a larger share of the revenue than mass products. This model enables companies that sell niche products to differentiate themselves from those offering blockbuster products and to access an alternative source of income.
Customers also benefit from the Long Tail model, as it allows them to browse a much broader and more diverse range of products, increasing the likelihood of finding products that meet their individual needs.
To successfully implement the Long Tail model, a company must be able to manage distribution costs efficiently, without incurring substantial additional expenses for selling niche products. Additionally, customers must be able to easily find these niche products without significant search costs.
To facilitate this, companies can use smart search and recommendation systems to propose products to customers based on their past searches and purchases. Another option is to allow customers to design products themselves, as seen in the Mass Customisation and User Design business models.
The Long Tail business model allows companies to sell small quantities of a wide range of products, generating profits over the long term. This approach enables companies to differentiate themselves and access alternative sources of income, while also giving customers the opportunity to find products that meet their specific needs.
Why should you consider the Long Tail business model?
There are a number of reasons that can make the Long Tail business model interesting for you to pursue.
- Lower costs to store, distribute, and merchandize. The Long Tail model is made possible by the lower cost of storing and distributing products and the vast potential for distribution. Centralized warehouses are more cost-effective than retail chains with local stores, and companies that excel in distribution, logistics, inventory management, and warehousing are likely to be successful in the Long Tail model.
- Lower merchandising costs. Online storefronts have the ability to display a large amount of inventory, reducing search costs for customers and the cost to display inventory.
- Recommendation engines, such as those used by Amazon and Netflix, can shift demand towards the Long Tail of the demand curve, away from popular products and towards niche, undiscovered products. However, it has been suggested that collaborative filters may exhibit a preference for popular products, shifting demand back towards hits or popular titles.
- Crowd Contribution, can help find what they are looking for through the efforts of volunteers who contribute connections and collaborate with companies to create and organize information. Google, for example, creates a Long Tail of web search through the direct involvement of its users and the linked content they provide.
- Data intelligence collected over time can inform product development in the Long Tail model. Companies like Netflix and Amazon use customer preference data to not only offer a marketplace of products, but also to create original content. Amazon has even used this data to launch its own private label brand, Elements, and to announce future food products.
While the Long Tail model has been successful for some companies, it may not be applicable to all businesses. Some academics have argued that true Long Tail businesses are rare and not universal.
Companies considering the Long Tail model should consider whether they would benefit from a wider distribution of inventory in terms of both inventory and search costs, and be prepared for a potential response from Amazon as the company aims to dominate every possible category.
Where did the Long Tail business model pattern originate from?
The Long Tail business model, first introduced by Chris Anderson in 2006, has experienced significant growth due to the advent of the Internet. This development has allowed companies to overcome traditional barriers such as physical distance and the need for physical storefronts, creating new sales opportunities for niche products.
The digitization of products has also facilitated the more cost-effective distribution of niche products. Companies can now store products in digital warehouses at a minimal cost, enabling them to be distributed more efficiently than ever before.
Online retailer Amazon and auction site eBay were two of the first companies to adopt the Long Tail model. It is estimated that Amazon generates 40% of its revenue from books that are not available from traditional booksellers. This Long Tail of niche products not only provides a valuable source of revenue for the company, but also helps it differentiate itself from traditional booksellers.
On eBay, individuals can create their own Long Tail by putting items up for auction. With several million auctions taking place on the site each day, it is home to a wide range of niche products, including Pope Benedict XVI’s Volkswagen Golf and a lunch date with Warren Buffett.
The growth of the Long Tail business model has been facilitated by the Internet and the digitization of products. Companies such as Amazon and eBay have been early adopters of this model, using it to generate significant revenue and differentiate themselves in their respective markets.
Applying the Long Tail business model
It may seem logical to offer a wide range of products in order to appeal to as many customers as possible. However, mature companies often struggle in competition because they are unable to focus on a few core products and competencies.
On the other hand, if a company is able to effectively utilize their knowledge of complexity in products, technologies, and markets, and keep complexity costs below those of their competitors, the Long Tail pattern can be highly promising. This is particularly true for companies that offer highly specialized or individualized products.
- How would Amazon manage our business?
- Would you create more value for your customers if they got everything from you?
- Will it be easier for your company to rank highly in internet search results with niche titles?
- Are we better equipped to handle complexity than our competitors?
- Are our processes and IT systems capable of managing a large number of products?
- Can we effectively manage back-end processes such as purchasing, order processing, logistics, and IT?
Niche inventories work: over half of Amazon’s book sales are made from books only carried by Amazon.
The vast majority of songs uploaded to Spotify (over 20K songs per day) attract less than a thousand listens in total.
Netflix has brought the Long Tail concept to video rentals, offering customers access to over 100,000 films, television series, and shows, which is significantly more than the number of titles available from traditional video rental stores. With over 26 million users, Netflix has largely replaced traditional video rental shops.
Apple has successfully applied the Long Tail pattern through its iTunes and App Store, the world’s largest online music and application stores. The vast selection offered by these stores has helped the company generate significant revenue and gain customer loyalty. Over 25 billion songs have been sold on iTunes, and over 50 billion applications have been sold through the App Store.
Both professional and non-professional users can upload and share a wide range of content, including personal videos, film and television clips, and video blogs, at no cost and with relatively few limitations. The low cost of storage allows for a vast variety of content, which can be easily accessed through a search engine and browsing directory. Millions of video clips can be played on YouTube or shared by embedding them on other websites and social media platforms.
- Business Model Navigator by Karolin Frankenberger and Oliver Gassmann
- Long Tail: Definition as a Business Strategy and How It Works by Investopedia
- 7 Brilliant Examples of Brands Driving Long-Tail Organic Traffic by Neil Patel
- The Long Tail by Cond Nast
- Business Model: Long Tail by Reason Street
- The Long Tail: Why the Future of Business Is Selling Less of More by Chris Anderson
- Long Tail Business Models by Alexander Osterwalder