Dec 032008

This is the first article in a four part series I’ve planned about “The Long Tail” and services (SaaS, On-Demand, etc) on the Internet.

If you have read anything at all about marketing for the web in the last few years, it is hard to imagine you might not have also heard the term, “The Long Tail.” The idea has a long history with statisticians, but the term we use dates back to 2004 when Chris Anderson wrote a magazine article in Wired describing the concepts. He also wrote a best selling book on concept, which has been recently updated. But, judging from many of the articles which use the term, I don’t blame you if you’re not sure what it is all about.

For entrepreneurs considering development of new Internet-based services, it is a critical concept. Going back to the well-written and much reviewed piece by Joel York – “Software-as-Service Success, The Top Ten Do’s and Don’t of SaaS” – Let’s assume for a minute you have read the piece (please!) and list the do’s and don’t in summary:

The Top Ten Dos of SaaS Success

  1. Choose a Large Market
  2. Create a Hub on the Web
  3. Accelerate Organic Growth
  4. Craft a Compelling Story
  5. Build the Business into the Product
  6. Reach across the Firewall
  7. Monetize Creatively
  8. Enable Mass Customization
  9. Open Up to the Cloud
  10. Leverage Your Community

The Don’ts: Ten Surefire Ways to Fail at SaaS

  1. Chase Elephants
  2. Waste Money Marketing Offline
  3. Launch without Online Trial
  4. Cover up Shortcomings with People
  5. Invest in Channel Partners too Early
  6. Bleed Cash Indefinitely
  7. Ignore the Long Tail
  8. Think You Can Control It
  9. Fail to be Creative
  10. Depend on Network Effects

So, if you think you understand SaaS and The Long Tail – How many of those points could be said to have at least something with do with it?

Now before we give an answer, consider these scenarios:

  • A bookseller in Grand Central Station, NY – that only offers books (no gum, no sodas, etc.) from the New York Times’ Best Sellers List.
  • His friend has an antiquarian bookstore, hidden away in a back alley in San Francisco – offering only a very select group of special books.

Which seller is likely to have a higher cash income before costs? Which seller is likely to make the most profit per sale? Which bookseller would be likely to see the best result from listing their offerings with Amazon? If they did list with Amazon, which bookseller is more likely to win in the long run?

The fellow with his stand in Grand Central has access to a huge pool walking by but his offering is basically a commodity. His customers have only a short period of time to consider what they will buy. He is likely to have a higher gross than his friend in San Francisco, but make very little per sale. He needs very high volume to make a go of it. He is competing with every drug store, supermarket checkout, mega-chain, – you name it. His costs are high because the spot where his stall sits is considered a prime opportunity. He has to keep an eye on the stock as long as his stall is open to keep it from walking away. His profit per book is relatively low because his purchasing power is relatively low and his competition can both buy and sell at lower price points. If he tried to sell on Amazon, he would have access to many more customers, but he would not be alone. He would be selling against many other outlets and Amazon itself – selling the same commodity. Although he would really only pay for the service if a book sold, his return for maintaining his offerings is likely to be low to zero. He might do better to invest in some crawling signs listing his best sellers in large letters.

The antiquarian on the other hand, probably pays very little for his out of the way storefront. He may not even be open on a daily or regular basis – preferring to meet his customer primarily “by appointment.’ Since his volumes are by their nature rare, there is very little competition and the price can be relatively high. But his market is also quite limited. Although his stock acquisition costs are likely to be relatively high, his return is good, when he makes sales. If he put his offerings on Amazon he would gain from access to the same size audience as his friend in New York, but his results are likely to be much better. Suddenly his rarities are exposed to a much larger pool, out of which some sales are likely to flow if he knows the antiquarian book market. People who would never have found him on the back streets of San Francisco or by word of mouth, can now find his books by searching Amazon. When they do, they are likely to find very few, if any, competitors.

Now considering that scenario – who is the big winner? Amazon, of course. Amazon has enabled customers to buy not only the best selling books at good prices but also some very rare and out of print books too if they are interested – by aggregating the market. Amazon serves The Long Tail for both buyers and sellers by being the head of the tail(s) – in this case. By bringing in sellers of products to both compete with Amazon’s own stock and extend their offerings, Amazon has created a market it wins from whether it sells directly or simply offers its technology as a tool to enable other sellers.

But – as Chris Anderson himself has written:

“Invoking the Long Tail is not a magic wand to explain away the apparent lack of demand for what you’ve got. The Long Tail is not a get-out-of-jail-free card for poor-selling product. Or weak sectors. Or bad ideas.”

A tail without a head, like our antiquarian, is simply a niche. The chance of finding his shop, while you’re in the mood to consider a shelf of old books, and on a day when he happens to have the one you are interested in – are slight. It would be much better if he knew of you and your interests, which is why most antiquarians cultivate buyer lists at fairs where the avid buyers congregate. The book fair is usually the “head” of his tail.

So, to borrow from Chris one more time – The Long Tail is not about:

  • Commodification – Our bookseller at Grand Central is in a commodity business and it is easy to see why Amazon offers little of value to him. He doesn’t have the ability to scale his volume enough to overcome the advantage of much larger sellers in the Amazon marketplace including Amazon itself.
  • The case for an all amateur, self-published future – While our antiquarian is selling rare books, there has to be a story, a market for what he is offering somewhere. If he was writing them but no one had heard of his books or him, Amazon is unlikely to be of much help.
  • The actual end of hits – Amazon needs the big selling items to get buyers, but it also needs the niche sellers to broaden the variety and continue to attract buyers or it drifts entirely into commodity sales. The market Amazon makes needs to feed the commodity sales and the niche sales equally even though the better known items will continue to outsell the niche items. The balance benefits Amazon and the niche sellers like our antiquarian, but makes it tougher for his friend in NY because he is competing directly with Amazon.
  • A focus on small markets at the exclusion of large ones – Without the top selling items, total traffic for Amazon will be low and the random chance of the seller in The Long Tail actually finding his buyers will decrease drastically.
  • Just any power law – If you read much about The Long Tail you are likely to run up against the term “power law.” Without getting into the math, the point of understanding The Long Tail is to know when power laws can be leveraged and how – The Long Tail requires “massive variety and a wide range between the hits (incoming prospects) and niches (opportunities for satisfying specific needs).” There are a lot of ways to make it work – but satisfying those two qualifications remains key.

So what is the answer? Which of the 10 does and 10 don’ts have something to do with The Long Tail? Hmmmm – join us for the next article in this series and I’ll tell you.

Yes, I will – now go save the RSS feed for this blog and read the linked articles. You should have the answer already! :-)

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The Long Tail – What It Is and Isn’t

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