Saturday, July 05, 2008

In support of the Long Tail

The special (Jul-Aug) edition of Harvard Business Review released this week to commemorate the 100 year anniversary of the Harvard Business School includes an article by Anita Elberse "Should you invest in the Long Tail" (page 88). In the article Anita questions the way in which online sales have played out over the last couple of years and compared this to the behaviour predicted by Chris Anderson's model of The Long Tail.

The Long Tail's general thesis is that the reduced costs of inventorying large numbers of low-volume products (the 'tail') will lead to companies generating new revenue streams beyond the traditional model of 'block-buster' or 'superstar' products (the 'head').

Elberse inspects sales data from sites such as QuickFlix, Rhapsody and Nielsen VideoScan and Nielsen SoundScan 'which monitor weekly purchases of videos and music through online channels and offline retailers'. Looking at Rhapsody over a 3-month period Elberse finds that 1% of titles accounted for 32% of sales; 10% accounted for 78%; and a total of 1 million titles were available for download.

Chris has already commented on the article over at where he looks at the different definition of 'head' & 'tail' he and Anita use in their analysis, and the different conclusions one reaches as a result. I won't bother going through the same points other than to say that: if you're going to critique a theory based on data your gathered, the least you should do is use a definition consistent with the original theory.

So, lets look instead at the part that really caught my attention - Implications for Strategy - the recommendations for retailers Elberse puts forward based on her analysis of the retail data.

1. If your goal is to cater to your heavy customers, broaden your assortment with more niche products. Despite the earlier conclusion about the Long Tail not being borne out by the data, this is essentially a long tail strategy. Although Elberse offers it with the full expectation that those niche products won't really sell, but will attract more people to the store to buy the block-busters.

The success of a long tail strategy relies on a strong referral network fueling new customer acquisition as a way of maintaining the low-cost positioning necessary. The breadth of the offering is one of the key factors attracting new customers.

2. Strictly manage the costs of offering products that will rarely sell. If possible, use online networks to construct creative models in which you incur no costs unless the customer actually initiates a transaction.

This recommendation seems to me to be so obvious as to be trivial. A Long Tail strategy is impossible to pursue effectively if you are accumulating costs associated with inventory regardless of sales. In order to offer a broad catalogue of product for sale it is imperative that inventory costs are either zero or entirely dependent on a sales transaction occuring.

3. Acquire and manage customers by using your most popular products. Again, this seems like trivial advice. Of the examples offered, only the provision of a recommendation engine provides any real value to the customers. Unlike "designing the flow of web pages so that consumers, even those searching for hit products, are naturally directed into the tail" - I was really surprised at this as it appears to fly in the face of any modern concepts of service design and customer-centredness. Especially as it also seems to conflict directly with the fourth tenet:

4. Even though obscure products may have a higher profit margin, resist the temptation to direct customers to the tail too often, or you'll risk their dissatisfaction.

I was a little disappointed to see no mention here of social networks and their value as a means of promotion of the store as a source of obscure products. As a form of essentially free marketing, it would seem to me that actively cultivating social network effects as a promotional tool would be high up on the list of advice to retailers hoping to take advantage of long tail economics.

I was also disappointed that Elberse performed no analysis (at least none that was shared) on how the product profile of heavy customers changes over time. Were their early purchases block-busters or obscure products? How about their more recent purchasing activity: in the head or the tail?

Finally, I would have like to have seen a comparison carried out between online & offline purchasing profiles with respect to the purchase of 'head' or 'tail' products.

I do agree with Anderson's happiness to see such a well-researched piece appearing in the HBR, and on a topic so close to our hearts. Following so hard on the heels of Tim Brown's article in the June 2008 issue on Design Thinking, it is especially pleasing. However, I don't agree with the slant Elberse has taken in her interpretation of the data, nor the strategy advice offered to retailers.

Take a read and let me know what you think.

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