'Long tail' is an extension of Pareto's Principle - The 80-20 Rule introduced in 1906, stated that 20% of the population owned and consumed 80% of the resources and vice versa. Subsequently it was simplified to: ‘A small no of things have a large impact’. Chris Anderson brought the same Principle in focus in 2004.
During an interview with the Robbie Vann-Adibe, the CEO of 'digital jukebox'
The strategy adopted by many businesses is to sell larger number of unique items in relatively small quantities and selling large quantities of fewer popular products (the 80-20 rule). Hence, a small percentage of products accumulate to a large majority of sales.
Why the Change?
Internet has transformed the way people choose both cultural and manufactured goods. The information age has increased consumer’s urge to find self-identifying products along with customer awareness and ability to share information; the idea of buying what ever was available has become obsolete (at least in the developed world). The Customer is the King; the needs of even the smallest niche are being catered to as these niches add up and make a substantial part of the retailer’s revenue.
Why called a Long Tail?
Video Link
A presentation given by
http://fora.tv/2006/05/12/Chris_Anderson_with_Will_Hearst
20 comments:
It reminds us about the value customers give to products(customers perception) of their likings and of famous quote that customer is King to business.
Sometimes it happens that 1000 of your products remains idle in the shelf and only one hit product that gets market acceptence, gave you tremendous sales that you can easily cover your break even and enjoy profits on it.
So, the thing is how well you position yourself, your products in market which gets customer attention.
I feel the long tail strategy is a good way to see where we stand and how can we operate our business more effectively. Having clear idea of what are you selling, the most hit products of yours, and the product which needs attention. You can plan and schedule your business accordingly.
Exactly! it's true that now the marketing strategies are more customer centered and in highly competitive market even a small revenue is great worth. Implementing the long tail strategy will surely reap long term revenues.
If we put it this way..
Say, Head part of the products are cash cows and Tail as dogs...(Refer to BCG matrix)then applying the long tail approach dogs can actually be considered pretty loyal if retained for longer periods.
OK. In simple words, dogs are those products that have low growth, low market share and we are advised to liquidate, but considering the long tail model we can actually retain them and still be profitable because most firms have large number of dogs generating low revenues,and adding the profits of all dogs can contribute a lot on long term basis (if opportunity costs of retaining dogs is low). As time passes these profits can approach to profits generated from the hit products.
and with a little effort on customization and differentiation those dogs can be converted into cash cows. no large investment required since they are already included in the product line.
however, revenues earned by 20 percent of the products can be harmful to the company too. with new entrants in the market and options available to the customer to chose from, these products may have low switching costs in the long run.
Most of the products starts as a Star or cash cow but ended on becoming a dog due to entry of new product and technology so main strategy for a company is to retain its product to ba a Star or Cash cow and on the same time convet dogs into cash cows because no company wants to be a dog...
The strategy adopted by many businesses is to sell larger number of unique items in relatively small quantities and selling large quantities of fewer popular products (the 80-20 rule). Hence, a small percentage of products accumulate to a large majority of sales.
Please assist me about it . I m not understanding ?
Any real life company example?
@irfan i think this example will help you.
Follow this link
http://slymarketing.com/2008/02/great-example-of-long-tail-marketing
a good example joel..
its simple. you sell shoes of size 13 or food for vegetarians .. both are targeted to a small population (with reference to the place they are sold at of course)and hence, are sold in relatively small quantities but may have a large variety to them. since they are not available otherwise they earn higher returns as compared to products where customers have the choice to choose from many. at the same time these products are not very popular among people, hence are sold in large quantities only to the relevant target audience. both cases signify large revenues earned by a few products either sold in large amount or in a large variety and both at a significantly distinguished price.
information and technology are the two aspects which have changed the perception of consumer regarding buying a product and customer can easily differentiate and select products for himself. the thing is by implementing the long tail phenomena we are generating revenue which is divided into two parts, first one is before the point of popularity which is head and secondly after the point of popularity that is tail. consequently the revenue that is being generated by head portion is smaller than tail because tail never falls to zero and this is how we still can generate revenue whether in a small amount
Also, retaining the present product line is far cheaper (obviously, if it is generating revenue even in small amounts) than going through whole process of new product development, and spending millions on production, R&D, advertisement, testing and launching the product. And still you are not sure if it will turn out to be a star, cash cow or dog.
So, working on existing products and converting them in cashcows or star will do.
However, the strategy adopted should take into account the opportunity costs and sunk costs associated.
The statement that customer is the King is even more valid in ever increasing competition and the entry of new players. Customers have choices now
Secondly the elite class is decreasing as a general trend through out the world and Middle n Lower class is gaining ground. So companies have to be proactive regarding the need and wants of the customers
Buying power has generally decreased and so companies should focus on more need based products rather than desire based products
Customers always welcomes innovation regarding new product development but they should be predominantly need based rather than desire based(generally speaking) new products.
Most of sales are of need based products these days in 80 20 rule.
Companies should be pro active regarding mass customization, robust designs and show flexibility.
@Abdur Rehman..Firstly you have mentioned out that "as a general trend elite class is decreasing...." can u please give the sound reasoning for this? Secondly if the middle class is getting strong then how can you say that purchasing power of people has decreased?
@ Abdul Rehman
First, i agree with Joel. I would also like to know the basis..
Second, increase in need-based products' sale and customer is king (indirectly have more purchasing power)is self-contradictory. If you say customer is KING, that would only be true if sales of desired-based products are high. Because if you sell need based products, you are king, because they need the product so they buy anyway. Also,in need-based products they have low purchasing power.
Second, i don't think today need-based products sell more, the companies selling desire-based products have higher revenues and profitability. Desired- based products cover most of shelf place of retailers and services... Take the example of Cocacola, Pepsi, KFC, other electronic products companies etc.
dosto laro mat :-)
everything revolves around customer. satisfy the customer in return customer will serve you by buying your products. simple hey yar.
no it is not solely market skimming.. skimming refers to cutting prices after capturing the major share in the beginning via higher prices.. the prices for the products following long tail may not necessarily be high in the beginning and then fall. they would rather remain constant i suppose.. either high because they have a monopoly.. or low because they sell in huge amounts with no variety.
@zari.. customer-centered approach talks about building the product around the customer, to fulfill an existing need.. the customer may or may not be aware of it. when you talk about "desired-based product" you are ignoring the need of 'desire' itself; in other words i would just better carrying a coke rather than pepsi because it will make me look cooler: the need for social acceptance, being cool etc ;)
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