A strong product ecosystem can take your startup to the next level of business. Product ecosystems are suites of interconnected, complementary solutions that businesses offer their consumers. The point is to offer a range of products that can address various consumer needs in connection with the [...]
Find out what the long tail strategy is, why it is becoming popular, and whether your startup should adopt it
A crisp and clear business strategy is what differentiates the winners from the losers in the cut-throat startup world. A business strategy can help entrepreneurs develop a vision and create common goals, help analyze the startup’s performance, as well as identify and help capitalize on future trends and opportunities in the market.
There are several business strategies to choose from, and usually it takes a little trial and error for a startup to find the right one – very few get it correct right off the bat. One of these strategies could be to target the mass market for a product or service in high demand in order to generate profits. The margin on such products might be less, but the high volume of sales can sometimes make up for it.
The long tail strategy is essentially the opposite of the above. The term was first coined by Wired Magazine’s Editor-in-Chief Chris Anderson in 2004. The strategy involves targeting several niche markets at once. The total sales volumes of these customized or off-the-beaten-track products and services has the potential to build up to the same level as mass market products or even bigger, claims Anderson.
Let’s understand what he means through a simple example. Let’s say you are selling obscure and hard to get books – titles that not many people are even aware of. Anderson says that although you will sell only a few copies of each title, the total sales could rival what you could generate by selling bestsellers only.
That’s essentially what started happening when Amazon books came into the picture. Books that had almost never sold before started selling. This is not to say that the appeal for bestsellers went down by any means. But, Anderson says, in the age of the Internet when physical storage space is no longer a barrier to offering obscure products, selling products that are less in demand can increase your sales.
Basically, his theory is based on the assumption that as supply and storage costs reduce, sellers can afford to sell more than they previously could. Take a physical retail store for example. Due to the limited shelf space, the store will have to stock products that are sure to sell. The store cannot afford to stock a product that is not in high demand, since storage space is limited and every product that doesn’t sell represents an opportunity cost.
Now, let’s take the example of a digital store like iTunes or Spotify. The cost of supply is significantly less since there is no cost associated with shelf space. Although cloud infrastructure costs exist, they are way lower than the expenses of renting a physical store. Therefore, sellers can now supply unlimited numbers of products like songs, which allows them to increase their earnings. Instead of earning only from the top sellers, the sellers can now earn even from products that generally have low demand.
The long tail theory also applies to content marketing. For instance, if a blogger targets a commonly-addressed topic to write about, he or she will face tremendous competition and may get lost in the sea of search results. But, by writing about a niche topic, he or she will attract a smaller group of customers, but it may be easier to gain visibility due to low competition.
Why is the long tail theory becoming popular?
There are two important reasons why the long tail theory is starting to gain popularity. Firstly, obscure products are now gaining more and more prominence because of recommendation algorithms. When you hop on to Amazon, you will easily find a lot of customized or hard-to-find products that cater to a specific niche.
Further, Anderson suggests that since customers can now find products that they previously could not access, they are slowly learning to march to the beat of their own drums rather than following the herd. Take documentaries for example. Apart from a small group of documentary buffs, very few people watched them or even knew how to find them before Netflix came along. Netflix provided access to thousands of movies and documentaries that had failed to gain the limelight in the past. The result was an increasing interest in obscure titles.
Similarly, the Internet made it possible to reach customers far and wide. Previously, people scattered across the globe who were interested in an obscure book may not have been able to get hold of a copy in their neighbourhood. With Internet and international logistics chains, the book can be made available to anyone no matter where they are located.
A successful example of long tail strategy implementation on a large scale, apart from Amazon, is eBay. Its marketplace offers common products as well as curiously obscure and unheard-of products. Amazon also makes most of its advertising revenue from small retailers, rather than Fortune 500 companies – another example of the long tail strategy.
What startup founders should know
Firstly, Anderson says that you cannot implement the long tail strategy in isolation. If you do, you run the risk of not gaining customers at all. This means that if you only target niche audiences, you may not gain enough visibility to attract the number of customers you need to sustain yourself. But if you try to sell obscure products along with the popular ones, the latter will draw in a crowd, some of whom may be curious enough to explore other products you’re selling.
Secondly, if your cost of supply is low, make sure to stock as many products as you can. The more products you stock, the more chances you have to generate sales.
Ultimately, the idea is that you should stop chasing the dream of selling popular, hype-driven products, and try to appeal to customers with diverse interests and in diverse niche markets. In fact, that’s what most startups are doing – servicing underserved markets. For instance, while traditional financial companies focussed on providing loans to multinational corporations and business giants, fintech startups are trying to earn profit by targeting small and medium sized businesses.
You should know, however, that while Anderson does provide data to substantiate his claims and theory, there are also certain opposing opinions. Harvard Business School associate professor Anita Elberse concludes based on data from DVD rentals and Rhapsody music from Quickflix, an Autralian Netflix clone, that bestsellers are not losing market but instead gaining it. However, Anderson has contested the claims, saying her conclusions differ due to a difference in the definition of ‘tail.’
She also goes on to claim that the customer satisfaction rate is low for obscure products and that people usually rate obscure books and movies poorly. Anderson, however, challenges the claim since Elberse took the liberty of extrapolating her conclusions to all sectors and products.
Ultimately, whether you choose the long tail strategy or not, as an entrepreneur you have to be open to trying and testing out different strategies and remain agile to survive and thrive.
Header image by Anna Shvets from unsplash