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November 7, 2007

Understanding the Long Tail

In sticking with the internet theme of the past two days, I want to introduce people to the fairly recent concept of the "Long Tail." First pointed out on Wired.com by Chris Anderson, the long-tail concept has to do with the cost of search. The Pareto Principle says that, generally speaking, 20% of the products sold in a retail environment will account for about 80% of the volume. It has been shown over and over in traditional retail environments how this holds true and planning for it is regarded as a good move. The Long Tail Principle takes that concept and expands it within the internet age. I first read about the concept in the paper called "Goodbye Pareto Principle, Hello Long Tail" by Erik Brynjolfsson, Yu Jeffrey Hu and Duncan Simester. It is an incredibly relevant subject for anyone who's business touches both a supply chain and the internet.

At the highest level, the Long Tail states that as the cost of search decreases to $0 (free) the Pareto Curve will shift up from the X axis marking an increase in the volume contributed by the slowest moving products. Essentially the Pareto Curve is still correct but consumers will more easily find the niche and unique products. The Long Tail can be considered an extension of the Pareto concept but making the rules a little more complicated.

The Pareto Principle was true because the time it took consumers to find the specialized product that they would want cost more than the advantage of having that perfect product. Essentially most consumers would choose the product that was closest to their requirements that was easily found inside the store (one of the more heavily advertised products). It was advertising and location that helped the top 20% of products as much as anything else, not always some other factor.

Amazon.com and Ebay.com have become the lead examples of the power of the long tail. Someone looking for a book on 15th Century Coin Collecting can now find a very specific reference when previously they may have been forced to settle on a generic collection book pushed forward by their local bookstore. Between Amazon, Ebay and similar sites everyone can find exactly what they are looking for with a little time.

So how does this apply to your business? Well first, if you have (or plan on having) a significant online presence you can almost forget about the Pareto Principle. You may be about to play by a whole new set of rules. Data analysis and demand planning/forecasting are much more important in the open environment of the internet. In a traditional store it is very easy to funnel people past what you really want to sell. You can put those last minute impulse buys near the register to get the late purchase. Targeted advertising for other departments was simple to accomplish. Online people may never see your homepage where you advertise the items you would like to sell most. An item you never expected to sell at all may become a smash overnight hit in a market you have never served before.

Figuring out how the Long Tail affects your online business is important. On the internet everyone can be a superstar if they play their cards right and use a little bit of planning. Companies with major physical store presence can struggle to find an online market while small two person businesses can suddenly gross millions in revenue. It's a new game that plays by different rules. Understanding the environment behind the rules could be the difference between success and failure.

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