What Is A Long-Tail Business Model? Long-Tail Business Model In A Nutshell

The long tail business model was popularised by former Wired Magazine editor Chris Anderson, who coined the phrase “long tail” and wrote a book on the subject called The Long Tail: Why the Future of Business Is Selling Less of More. The long tail business model suggests companies can profit from selling low-volume niche products. In theory, selling a significant number of these products is more profitable than selling fewer, more popular products.

Understanding the long tail business model

To explain the long tail business model as simply as possible, let us begin by taking a look at the traditional retail model. Most businesses generate profit by marketing and selling a relatively small number of popular but profitable items. The long tail model favors the opposite approach, with a focus on selling a larger number of less popular, low-demand niche items.

Anderson suggested the collective market share of these niche items could exceed the market share of just a few more popular items. However, this would only occur if the business in question had a sizeable distribution channel. 

Online auction site eBay is perhaps the best example of the long tail business model in action. The success of the platform is due to the vast quantities of buyers and sellers who trade in smaller quantities of niche or non-bestseller items.

In his article, Chris Anderson explained:

You can find everything out there on the Long Tail. There’s the back catalog, older albums still fondly remembered by longtime fans or rediscovered by new ones. There are live tracks, B-sides, remixes, even (gasp) covers. There are niches by the thousands, genre within genre within genre: Imagine an entire Tower Records devoted to ’80s hair bands or ambient dub. There are foreign bands, once priced out of reach in the Import aisle, and obscure bands on even more obscure labels, many of which don’t have the distribution clout to get into Tower at all.

The long tail has been an incredible way for tech companies, once startups – now turned into tech giants – to gain popularity and redefine entire industries. For instance, Google enabled you to find any information, anywhere, also on the most arcane blogs, as long as it seemed relevant.

YouTube could help you find videos related to any microniche. Amazon could help you find books on any topic, even the seemingly most obsure. Netflix helped users find the most improbable movies, also from independent producers.

It’s worth pointing out, that as those companies scaled up, and became tech giants, they also, in part, smoothed up their algorithms to skew information toward more recognizable and known brands.

Yet the long tail business model remains an incredible way to scale up markets dominated by incumbents. As they offer opportunities to consumers to find options that incumbents don’t want or can’t offer.

Take the case of how Google, now Alphabet, at this stage prioritizes known media brands in search, or known authors, as more trusted sources of information. Which, at the scale of the company is critical, because they can’t get things wrong. While, when initially scaling up a company like Google had the option to offer more unconventional results to users. Yet, this option is much less limited today.

Structure of the long tail business model

The long tail business model is represented by a long tail distribution curve.

Once upon a time, the only way to sell a product was through a bricks-and-mortar store. Since each store was constrained by its total physical floor space, businesses produced or showcased only the most popular products. These high sales volume products make up the head of the long tail distribution.

In the middle torso section of the curve, the number of available products increases while their individual value decreases. The curve eventually flattens into the long tail, comprising the myriad niche products that are relatively unpopular and sell in smaller quantities. 

When eCommerce achieved critical mass, consumers shifted away from buying items in physical stores and toward buying them online. More to the point, they transitioned from buying popular, high-volume items to more unique, low-volume items. 

For merchants, this shift is significant. As the torso and tail sections of the curve continue to grow, they become a more viable market and source of income.

Long tail business model features

The long tail business model has several characteristic features:

Lower distribution, storage, and merchandising costs

Centralized storage facilities tend to be less expensive to operate than retail chains that must manage multiple physical stores. Distribution, logistics, and inventory management are more efficient. What’s more, the business has access to more consumer buying data and is not limited by finite floor space.

Crowd contribution

Search engines like Google index long-tail keywords which connect buyers with the sellers of niche items. Google also connects consumers with reviews or collaborations involving long-tail products, increasing their visibility in the search engines and by extension, the number of consumers that become aware of them. These items can sit on virtual shelves indefinitely and there is no requirement that they are sold quickly to free up space.

Recommendation services

Companies such as Netflix and Spotify have also introduced personalized content recommendations on their respective platforms. These services introduce niche content to consumers, which shifts their attention away from more mainstream content. In the case of Netflix, the shift is being amplified since the streaming service is now developing content based on long-tail viewing preferences.

Key takeaways:

  • The long tail business model suggests companies can profit from selling low-volume niche products. In theory, selling a significant number of these products is more profitable than selling fewer, more popular products.
  • The long tail business model is at least partly explained by the consumer shift to purchasing items online. Free from the physical constraints of limited floor space, merchants can produce or sell as many different niche items as they desire.
  • The long tail business model is characterized by lower merchandising, distribution, and storage costs. Crowd contribution and recommendation services are also central to increasing the visibility of long-tail products.

Connected business concepts

The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.
A decentralized autonomous organization (DAO) operates autonomously on blockchain protocol under rules governed by smart contracts. DAO is among the most important innovations that Blockchain has brought to the business world, which can create “super entities” or large entities that do not have a central authority but are instead managed in a decentralized manner.

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