Long Tail will end in heartbreak

Beware false profits

Analysis The long tail merchandising - selling products with relatively low sales - excites technologists who think they have discovered something revolutionary. But not only is the concept an old one, it's likely to burn investors.

Goods and services typically follow predictable demand patterns. The simplest expression is the 80-20 rule: 20 percent of the products in a category account for 80 pe rcent of revenues. In other words, 80 per cent of products do not sell well, and they represent the long flat part of the sales curve—the long tail—where unit sales are negligible.

Nothing New

The long tail is not a new consumer products phenomenon. The strategy requires large markets. Retailers with vast merchandise assortments, for example music retailers such as Tower, Virgin and HMV, have typically decided to locate in the largest metropolitan areas, where large numbers of shoppers with diverse interests create demand for products that sell in small quantities.

Technology can turn small markets into larger ones. Before readers jump to the Internet era, they should pause to understand the impact of prior advances on retail.

A hundred years ago, reliable mail service gave rise to catalogue retailers, whose books of 1,000 pages or more brought goods to farming communities that the local general store did not carry.

Automobiles and highways permitted malls and mass merchants to sprout up in small towns and rural markets, offering broader selections than were previously available outside of central cities. Each new technology largely supplants the prior one: malls, mass merchandising and big box retail was the death knell of the large catalogs. So in this historical context, the long tail is an evolutionary development, not a revolutionary one.

Risky business

Pent-up demand for most long tail products is quickly satisfied, but sometimes demand grows around previously marginalized goods and services. Netflix, for example, boasts how it turned The Conversation, a relatively forgotten film by Francis Ford Coppola into one of its most frequently rented movies. But this is not a long tail miracle, but market segmentation: discovering how a niche market has different preferences than the mass market and then addressing it.

Using the long tail as a route to profitability is a risky proposition. There are low barriers of entry for being a long tail merchant. Almost anyone can create a site and fulfill orders using distributors. This inability to differentiate based on assortment means that the merchant will either have to find other ways to distinguish their site from a myriad of competitors or they will have to compete on price, a very dangerous place to be.

Amazon.com, for example, continually engineers its software to improve the shopping experience and invests in a substantial distribution system to maintain a competitive advantage that broad assortments, alone, cannot provide.

Even so, Amazon.com cannot escape the need to offer price inducements, as it is doing with a free shipping option.

Bigger Selections are Not Better for Shoppers

Making a decision can be costly for consumers. Choosing among alternatives entails <a href="http://sloanreview.mit.edu/smr/issue/2001/spring/1a/" for consumers, according to economic theory. If the search costs are too high, shoppers become overwhelmed and avoid a decision, resulting in lost sales.

Big selections, therefore, are a mixed blessing. Although breadth attracts destination shoppers looking for a specific hard to find products, too many choices results in lost sales for other products by making routine shopping difficult. Many long tail advocates do not appreciate that editing assortments is a proven route to retail success, while others continue their search for the long tail holy grail, a better recommendation engine.

Consumers say they prefer a selection, but they often go out of their way to find a limited number of choices, albeit the right one for their individual preference. When buying a shirt, a consumer goes to the retailer they know will likely have the style and price they want; he or she does not consider every shirt in every color available somewhere in the world. This is how smaller specialty catalogs drove the big book catalogues out of the marketplace.

Another example is playing out in music retail. The two segments that gained market share over the last few years were the online sellers and the mass merchants. Apple's iTunes Music Store for digital downloads, and Amazon.com for compact discs have excellent user interfaces that make searching for a specific title significantly easier than driving to a Tower Records, searching through the bins in the hope that the desired title is in stock. Online selling attracts destination shoppers. However, impulse purchases account for most of music sold. Wal-Mart, the largest music seller in the world, places music in highly visible locations at low prices to tempt its shoppers that visit its largest stores twice a week on average. Wal-Mart needs a limited selection (about 3,000 titles in 500 square feet) to entice shoppers with the hits - it could not succeed with a broad selection - so it makes a choice: it deliberately concedes the destination shopper of niche product and older titles to the online sellers, in order to dominate the mass market.

While "Long Tail" is the newest catchy business phrase, but is just another name for a market segmentation using broad assortments. It is not the ultimate competitive advantage. In fact, reliance on broad assortments can confuse and alienate consumers and inadequately differentiate a retailer from its competitors.

The long tail it is neither a marketing revolution, nor a guarantee for success.®

Barry Sosnick is the president and founder of Earful.info, a provider of strategic marketing and risk management solutions to the recorded music industry.