In his ground-breaking work, The Long Tail, Chris Anderson says that there’s money to be made in the long tail of niche offerings. It’s called the “long tail” because if you look at demand on a chart, there is high demand for a small number of hits or blockbusters, but the demand for niche offerings tails off in a long flat curve — hence the term “long tail.”
Recently, Anita Elberse, Harvard Business School professor, published a critique of Chris Anderson’s long tail theory in the Harvard Business Review. Based on her research of two markets, she says Anderson is wrong and there is more money to be made in a few blockbusters or hits, than in niche offerings.
So, is it time to chuck Anderson’s long tail theory?
Speaking from the perspective of small businesses, the answer is an emphatic “NO.”
Elberse may have a point when it comes to large corporations. But when you view it from the perspective of small businesses, the answer is: Anderson’s long tail still makes perfect sense as a product and market strategy for many small businesses.
You have to remember that Elberse views the issue through the prism of large corporations. She gives the example of Grand Central Publishing (formerly Warner Books), and how they publish 300 titles a year. They may only heavily market two of them in a calculated gamble on them becoming blockbuster hits. Many of the other titles they publish are money losers. The book company has to invest millions in marketing the two chosen blockbuster candidates. If their gamble pays off they earn several million in profit from the two blockbusters. Although risky, in the end it may be worth it to focus on a few blockbusters.
But here’s my point: Small businesses do not have millions to invest. Small businesses have an infinitesimally small chance of ever creating a blockbuster. So the blockbuster option really isn’t an option for 99.9999% of small businesses anyway.
No, many of us small business owners are forced to live in the niches if we want to build a business.
Often the big markets are saturated by well-funded players and if we want to compete we have to find an underserved niche. We can keep our costs low, so we have the advantage of being able to deal in niche offerings more profitably than large corporations. Besides, we don’t have the marketing funds needed to create blockbusters, so we may not have any choice, anyway, but to live in the long tail — anything else is a pipe dream.
Steve King of Small Biz Labs emphasizes the economic realities of long tail niches to small businesses:
Our research shows that the long tail is happening and the number of niches able to support small businesses … is rapidly increasing. The two main drivers of this are:
1. Reductions in the cost of doing business in many niche markets. Technology, outsourcing and access to third-party services are making it easier and cheaper to create niche or highly customized products and services.
2. The Internet has made it cheaper and easier for buyers and sellers of niche products and services to find one another. This means the producers of niche products can cost effectively attract enough customers to create viable niche businesses.
These two drivers are combining to shift demand curves and create many new niche opportunities – for both digital and physical goods ….
Here’s the bottom line: niche offerings — long tail offerings — continue to make financial and strategic sense for small businesses. For large corporations, maybe not so much.
Just understand the difference depending on the size of your company — don’t let articles like Elberse’s confuse your strategy and get you off track. Elberse’s conclusion suggests the long tail may not make sense — for large companies. But for your small business, the long tail and niches may be just where you need to be. In fact, they may be the only place you can afford to be.
The long tail does also work well for companies like Amazon. I’ve never brought a “blockbuster” book from them, but I spend thousands per year on niche (business) titles with them simply because they are the only supplier that carries them.
I see no reason not to do both. I still send out my stuff to major magazines for that occasional blockbuster sale, and I sell to the end of the tail from my site.
Maybe I oughta come out with some “whole dog” theory.
@John: good point about Amazon.
@Andertoons: Mark, I’d love to see you do something with the whole dog theory! Could make for a fun cartoon series, too!
Small business lives in niche markets. For many small business owners, that is the goal, and there is no desire to hit home runs. They are happy to hit singles, and hit the odd double once in awhile. For large corporations, what would be viewed by many small business people as a home run, is not even a bunt single for them. The goals and targets are much different for different sizes of companies.
I see Amazon, and its business model, as more of an anomoly in the large business field than a typical one. As Anita pointed out, Amazon is not even typical of the way the publishing industry as a whole does business. The long tail seeks niches, with a few niches becoming success stories. As a result, there is real potential value to taking the occasional home run swing, but keep the main focus on the core business niche.
A good strategy might be to focus on the main niche, but try for some larger blockbusters without being dependent upon them for the success of the business. The worst result would be that nothing would happen; another possibility might be a partial success that exceeded any expectations; and there may be that moment of glory of hitting a grand slam home run.
Even within a small business, you may have several long-tail mini profit centers.
For example, you may make 75% of your income from consulting and the other 25% from speaking fees, eBook and book sales, advertising, affiliate revenue, etc.
If you can create long tail products that only cost money when they are making money, even a small business longtail niche will have sub-longtail revenue streams.
The people who say the long tail can’t work are lazy, that’s all. The reality is, as you pointed out Anita. It exists, and all this foolishness of saying it can’t be “monetized” is silly. It can, and it is every day by people who hustle and work hard.
Dawn Rivers Baker
Actually, the Long Tail theory works nicely for large companies, too — when they use their resources to provide platforms that allow Long Tail suppliers (aka small businesses) to gain access to our markets. That, in effect, is what Amazon does for niche micro-publishers and what Google does for small advertisers and small online publishers.
Chris Anderson also uses examples like Rhapsody in the music industry. The bottom line is that, while it doesn’t make economic sense for those large firms to get into selling in the Long Tail marketplace, it makes a lot of sense (in terms of the money they could make) for them to make it easier for us to do it.
If anything, Anita, your critique of the Elberse article is simply an illustration of how economically myopic they are over at the Harvard Business Review.
I think Elberse’s study validates the part of the long tail theory most relevant to small businesses – that long tail niche opportunities are growing in number and importance. As Anita points out, the long tail theory areas under dispute don’t matter much to small businesses.
This debate also provides a great example of how calculus can be used in real life (you have to integrate under two curves to figure out if the tail is bigger than the head). Very useful for those of us with teenage boys complaining about math class.
Great post, great comments. I love the insight that the HBR research is valid but comes from the large company point of view.
Also, I’m glad to see Anita Campbell and Steve King on the same post, that’s a good match.
Somewhere nestled in this discussion is amazon.com as inherently web business, born and raised on it, whose growth is enmeshed in the long tail. Could it be that along with the split of big vs small business there’s also new vs. old business?
This is really not a question of either/or. Steve – to your point, the area under the curve is not 0, either on the left or on the right.
From what I have seen, large corporations are inherently inefficient in reaching to niche markets. The ROI does not make sense for them. However, even they cannot afford to ignore long tail. They develop an eco-system of partners and small businesses that create niche in two ways : 1. customizing/specializing the products for a niche market, and 2. reaching out to small segments.
For us as small business owners, while we all fancy a blockbuster hit, the amount of investment needed to make one, and hence the risk is very very high. Naturally- we tend to play in the so-called long tail.
I love this post, Anita. I’m a fan of Anderson’s work and of course the long tail exists and works, as many others have pointed out and that you stated — many businesses have to “live in the niches.” It has always been so although it is easier in some ways today to find those buyers. I love Andertoons comment about a whole dog theory. Awesome. And Kukral has it nailed and it reminds me that i need to get off my tail…
Interesting article Anita.
It may be worth remembering that most of the successful global companies today started out as small businesses exploiting niche markets.
I have to chew this for a bit. I think that the long tail has worked well for the blogosphere and for other areas.
I’m glad to see someone is re-igniting this post. It is and was a stellar commentary on the importance of a niche focus to the small biz owner. I posted a comment in July when Anita wrote this and later read that HBR piece, too.
Chris Anderson has just completed a new book called, Free, which is due out soon. In it, he talks about the free model in use by so many web businesses and that it still has its place, but, as always, you don’t have a business if all you do is give your product and services away.
Thanks to Sheri for bringing this post back to life!