long-tail-business-model

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 Model Types And Frameworks

What’s A Business Model

fourweekmba-business-model-framework
An effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand. The financial dimension will help you develop proper distribution channels by identifying the people that are willing to pay for your product or service and make it financially sustainable in the long run.

Business Model Innovation

business-model-innovation
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.

Level of Digitalization

stages-of-digital-transformation
Digital and tech business models can be classified according to four levels of transformation into digitally-enabled, digitally-enhanced, tech or platform business models, and business platforms/ecosystems.

Digital Business Model

digital-business-models
A digital business model might be defined as a model that leverages digital technologies to improve several aspects of an organization. From how the company acquires customers, to what product/service it provides. A digital business model is such when digital technology helps enhance its value proposition.

Tech Business Model

business-model-template
A tech business model is made of four main components: value model (value propositions, mission, vision), technological model (R&D management), distribution model (sales and marketing organizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.

Platform Business Model

platform-business-models
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

AI Business Model

ai-business-models

Blockchain Business Model

blockchain-business-models
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.

Asymmetric Business Models

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Attention Merchant Business Model

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Open-Core Business Model

open-core
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.

Cloud Business Models

cloud-business-models
Cloud business models are all built on top of cloud computing, a concept that took over around 2006 when former Google’s CEO Eric Schmit mentioned it. Most cloud-based business models can be classified as IaaS (Infrastructure as a Service), PaaS (Platform as a Service), or SaaS (Software as a Service). While those models are primarily monetized via subscriptions, they are monetized via pay-as-you-go revenue models and hybrid models (subscriptions + pay-as-you-go).

Open Source Business Model

open-source-business-model
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.

Freemium Business Model

freemium-business-model
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Freeterprise Business Model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Marketplace Business Models

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

B2B vs B2C Business Model

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B2B, which stands for business-to-business, is a process for selling products or services to other businesses. On the other hand, a B2C sells directly to its consumers.

B2B2C Business Model

b2b2c
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

D2C Business Model

direct-to-consumer
Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer. In this way, the company can cut through intermediaries and increase its margins. However, to be successful the direct-to-consumers company needs to build its own distribution, which in the short term can be more expensive. Yet in the long-term creates a competitive advantage.

C2C Business Model

C2C-business-model
The C2C business model describes a market environment where one customer purchases from another on a third-party platform that may also handle the transaction. Under the C2C model, both the seller and the buyer are considered consumers. Customer to customer (C2C) is, therefore, a business model where consumers buy and sell directly between themselves. Consumer-to-consumer has become a prevalent business model especially as the web helped disintermediate various industries.

Retail Business Model

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

Wholesale Business Model

wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Crowdsourcing Business Model

crowdsourcing
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.

Franchising Business Model

franchained-business-model
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.

Brokerage Business Model

brokerage-business
Businesses employing the brokerage business model make money via brokerage services. This means they are involved with the facilitation, negotiation, or arbitration of a transaction between a buyer and a seller. The brokerage business model involves a business connecting buyers with sellers to collect a commission on the resultant transaction. Therefore, acting as a middleman within a transaction.

Dropshipping Business Model

dropshipping-business-model
Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.

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