The oft cited “80/20 Rule” of business dictates that 80% of a firm’s revenue can usually be attributed to only its top 20% of products. This rule has been demonstrated to hold true in a wide variety of contexts ranging from CD sales at Wal-Mart to box office receipts of Hollywood studios. In fact, some people (not these authors, of course) have even gone as far as to apply the 80/20 rule their HBS case reading habits-arguing that 80% of learning probably really only comes from doing 20% of the reading.
Chris Anderson, the Editor-in-Chief of Wired magazine, traveled to HBS last Tuesday to shake-up this concept and introduce a revolutionary new theory that he discovered and coined “The Long Tail.” Through his interpretation of interesting new data from Internet sales of music and books, Mr. Anderson argues that the world is not 80/20 after all and that businesses are realizing that there are large underserved markets of consumers who demand the obscure products that populate the far right-hand side of the product distribution, the long tail.
The Old 80/20 World
Anderson claims that most businesses are entrenched in the old way of thinking which revolves around the 80/20 rule. This drives them to focus on generating “hits” that fall into the top 20% of the popularity distribution. As a result, there are significant markets which are not being served because they are not singly large enough, or are large but not concentrated enough geographically. Additionally, there is often a supply of products for these markets, but their sale and distribution are not economical because of the lack of geographical density. This is a standard case where supply & demand don’t meet.
A New Theory Emerges
Enter the Internet and the new economy. The cost of warehousing and shelf space has been so reduced-in some case to zero-that it has become economical to serve these markets. Whereas in the past, businesses would have to pander to the lowest common denominator with hits, they can now attack the niches more profitably. Anderson predicts that the future will be all about niche products-projecting that in aggregate, they will become half or more of the volume in many product categories.
Don’t Entirely Count Out the Hits
While Anderson preaches of the growing importance of the Long Tail, he notes that hit products still play an important role. For example, hits are useful in driving traffic into the Long Tail. Think of the “People who bought this also bought these” section of Amazon.com or the “If you liked this movie, check out these other titles” recommendation. Hit products form common points of interests that bring in the masses. From there people disperse into their niche interests.
Cutting Through the Noise
Anderson acknowledged that as you increase the variety of products and move further down the tail, there is more noise. That is, more choices means there is more information to process in order to filter for what you want. All this noise can depress demand-some people are overwhelmed by the choices and say “To heck with it, I just can’t decide.” Anderson said that recommendations, reviews, detailed products specs, and product associations are increasingly necessary to cut through the noise and guide customers to what they will want.
Interestingly, and rather controversially, Anderson posited that in the Long Tail world, product branding will become less important.
Instead of relying on brands, people will come to rely more on objective product specs, user driven recommendations, and reviews. In fact, in this world, the reviews themselves may develop large brands which carry even more weight than the product’s brand-think Roger Egbert; his thumbs-up is often more of a decision driver than a studio’s brand.
A Theory in Development
Anderson’s research on the Long Tail is ongoing, and he is actively combing through data for a new book he is writing on the theory. The 70 students that Anderson addressed in Aldrich 8 asked many thoughtful questions and challenged him on several points. For example, is the Internet purchasing data he uses biased since people interested in niche products are more likely to shop there? And, does the Long Tail represent an expansion of the market or is it simply a reallocation of purchases from hits to niche products?
Anderson welcomed the challenge, encouraging attendees to interrupt with questions and comments (he must have read up on how we do things here). He says he enjoys addressing “smart” audiences like HBS students because their queries help him to further refine his theory. At the end of his presentation, Anderson challenged the audience with ten unanswered questions. These ranged from The Long Tail’s effect on different categories of products and services to probing the behavior and characteristics of markets inhabiting different parts of the tail. For instance, should products further down the tail be priced higher or lower? Mr. Anderson, we are here for an MBA, not a PHD – if you can please give us the answers, then we’ll monetize them…
In his continuing research efforts, which he says focus on “The Economics of Abundance”, Anderson is working with groups from Stanford, MIT, and elsewhere. He welcomes interested HBS students to get involved. To read more on the topic, see Anderson’s blog at www.TheLongTail.com.