40428 - Alan Spence: The Long Tail Theory

The now unquestionable reliance upon the internet has had significant impact upon the business sector, little more so than in the world of retail. The major outcome being that anyone can find exactly want they are looking for. Providing you are not sufficiently remote that access to the internet is obtainable, the potential consumer has an almost limitless array of drains with which to dispense their wealth.

This new found freedom has had many implications for the traditional retail sector, one of the more major developments is summarised by the “Long Tail” theory. This notion was first proposed by Chris Anderson via a “wired” magazine article in October 2004.

The principle behind this being basically that consumer preference is not suppressed. The boundless reach of the internet ensures that the customer is no longer constrained by what is available in their local “bricks and mortar” store. Unique tastes can be much better catered for, with resulting knock on effects for what were once the staple products for a firm.

“Even if you have one-in-a million tastes, there are still over a thousand like-minded consumers who share your niche tastes.”

[Erik Brynjolfsson, Yu “Jeffrey” Hu, Michael D. Smith; 2006]

This is the central pivot around which the Long Tail theory operates, however requiring the vast audience of the internet to bolster what would once be considered minority interests.

This theory is graphically represented below;

Typical Sales distribution of a “Bricks and Mortar” retail outlet;

[figure I]

Resultant distribution of Sales from an online competitor;

[figure II]

Note the differences;

“In many cases the infrequent or low-amplitude events—the long tail, represented here by the yellow portion of the graph—can cumulatively outnumber or outweigh the initial portion of the graph, such that in aggregate they comprise the majority.”

[Wikipedia, 2006]

The key factor that determines whether a sales distribution has a Long Tail is the marginal cost of inventory. This is where the online firms have a significant comparative advantage. The physical limitations of a shop inhibit the range of products it can display. In order to fully utilise its resources it elects only to stock those products that are destined to turnover most readily.

The online firm can choose to locate anywhere it likes as the customers do not enter the facilities physically the firm does not have to consider its proximity to a local market. In response establishes itself where the comparative cost of rent and rates are lower. Not hindered by the congested buildings on the high street its warehouses can be sufficiently large to accommodate a massively more enlarged product range. It becomes much more economically viable to hold unpopular products for sale.

For example;

[Erik Brynjolfsson, Yu “Jeffrey” Hu, Michael D. Smith; 2006]

With the inevitable effect that the demand for the most popular products is reduced, creating the much flatter distribution of sales as depicted in figure (ii).

The implications of this may be that with reduced market demand there lies less incentive for firms to produces mass market products. Sparking the end of the corporate giants?

In any case the wheels of change have been set in motion, data from Amazon.com clearly show that a large proportion of its sales consist of “titles that wouldn’t normally be found in brick-and-mortar stores”.

[Erik Brynjolfsson, Yu “Jeffrey” Hu, Michael D. Smith; 2006]

Niche products will receive a dramatic boost as there is now exists a channel for their voice to be heard by the public. A revert back to smaller, more organic organisation made more feasible as the relative costs of distribution has fallen with the widespread application of new technologies.

As regards the Accountants’ interest in this state of flux;

It is apparent that a new form of client will be presented before them. Every likelihood suggesting that they may arise from a less sophisticated environment with access to greatly reduced resources; in comparison to the multinational corporations whose connotations with the creation of “chart toppers” once lay unchallenged.

The profession must evolve to accommodate this less well informed clientele, with appropriate mechanisms in place to allow them to decipher the level of information required from them; while at the same time placing some onus on the specialist to see that the customer understands the process and are not bamboozled.

Such developments in the secondary market, as detailed above, may instigate a similar response in the tertiary sector. In order to fuel the existence of the newly established firms a well structured business plan will need to evolve. Accountants are ideally placed to expand their implementation of this service. To ensure a stable client base irrespective of perpetual changes in business at large.

“Once all of this is in place, the natural shape of demand is revealed . . . . [T]hat shape is far less hit-driven than we have been led to believe.”

[Rick Ferguson, Kelly Hlavinka; 2006]

Bibliography;

From Niches to Riches: The Anatomy of the Long Tail

Erik Brynjolfsson, Yu “Jeffrey” Hu, Michael D. Smith

June, 2006.

Superstars and Underdogs:

An Examination of the Long Tail Phenomenon in Video Sales

Anita Elberse, Felix Oberholzer-Gee

The long tail of loyalty: how personalized dialogue and customized rewards will change marketing forever

Rick Ferguson, Kelly Hlavinka.

The Journal of Consumer Marketing.