The Long Tail Business Model

The Long Tail is a new business strategy which says that a accumulated number of sales of unique items, which each produce a small number of sales, results in significant profits.

Wikipedia says this, "The phrase The Long Tail (as a proper noun) was first coined by Chris Anderson in an October 2004 Wired magazine article to describe the niche strategy of businesses, such as Amazon.com or Netflix, that sell a large number of unique items, each in relatively small quantities.

"Given a large enough availability of choice, a large population of customers, and negligible stocking and distribution costs, the selection and buying pattern of the population results in a power law distribution curve, or Pareto distribution. This suggests that a market with a high freedom of choice will create a certain degree of inequality by favoring the upper 20% of the items ('hits' or 'head') against the other 80% ('non-hits' or 'long tail')."

In his 2004 article for Wired Magazine, Chris Anderson uses the example of Amazon.com to describe a retailer with "unlimited shelf space." Anderson argues that "products that are in low demand or have low sales volume can collectively make up a market share that rivals or exceeds the relatively few current bestsellers and blockbusters, if the store or distribution channel is large enough." This concept can be used by even small sellers especially when their costs are fixed (ie: website or flat-rate selling venue) and they have ready access to large numbers of varied, often small size and/or low priced items.

This Power Law distribution graph give a visual representation of this concept. Imagine that the left axis is the number of sales (popularity of the item) and the lower axis is the distribution of available products, with the most popular (on the left side) representing the most sales per product.

What should be intuitively understood, but may be difficult for some to see, is that as the graph extends to the right (as more products are available 'in stock') the number of low demand sales becomes a significant profit source. This becomes manifest when the area in yellow exceeds the area in green. The key concept is unlimited shelf space (the Internet) and, perhaps, digital delivery or service items, in order to stock an extensive number of low volume items.

So what does this have to do with the small online business person? Like Amazon, all online sellers have nearly unlimited display space and a huge potential market, either at their selling venue, website, or other webstore. Sellers can maintain a large virtual catalog, without the expense of displaying physical items. They can often offer items for sale that they don't acquire until the sale is made or which can be drop shipped directly from manufacturers or distributors.

To make all this work it is necessary to have a well-stocked website, use good SEO and Google Base to obtain top Google placement, and provide top-notch service and customer support. This is the extreme edge even the small, independent, business person can gain on the big box retailers.

As Anderson points out in his article, using the Long Tail model can gain you other important opportunities as well. By making specific use of cross-promotion techniques, customer reviews, polls, newsletters and other contact requests, and related marketing tools you can develop new business and upsell customers with products you might otherwise not be able to afford to promote due to low unit sales numbers. If you selling craft supplies, for example, be sure your website groups like products and points customers to add-ons and other products likely to be purchased with the original choice. The larger your product selection the bigger the net you cast to catch your customers and, therefore, the bigger your sales can be. You end up giving great value to your customer by putting all their needs in one easy-to-find location and create repeat business as a by-product.