“The long tail” is a phrase first coined by Chris Anderson in an October 2004 Wired magazine article. The concept describes a new way to look at markets and is illustrative of the business strategy of Internet companies, including Amazon.com and Netflix, that sell a large number of unique items, each in relatively small quantities, to a very large base of customers. This buying pattern creates what is called a power-law distribution curve—or a long tail. In this series of articles, Selling Stock will examine how the long-tail strategy applies to the stock-photo industry.
Anderson points out that in 2004, Barnes & Noble limited the books it offered customers to 130,000 titles. During that same period, more than half of Amazon’s book sales came from outside its top-selling 130,000 titles. Similarly, Blockbuster carried fewer than 3,000 DVD titles, but one fifth of Netflix’s rentals were for titles outside its top 3,000. Thus, limiting product offerings often creates a long tail of underserved customers who want something different.
Even Wal-Mart, which many believe stocks everything, must sell at least 100,000 copies of a CD to cover its retail overhead and make a sufficient profit. Less than 1% of all CDs do that kind of volume. If you want any of the other 99%, you must go somewhere other than Wal-Mart to find them.
Brick-and-mortar operations find it necessary to limit the items they carry to those in high demand due to display, distribution and inventory costs. To some extent, small local specialty shops get around this problem and carry a greater variety of products in their area of specialization, but they are generally limited to serving a very small percentage of total potential customers for the products they stock. Internet companies can economically justify maintaining a much greater variety of products because they do not have the same display, distribution and inventory problems as brick-and-mortar companies.
Due to comparatively low display, distribution and inventory costs, Internet businesses can realize significant profit from selling small quantities of very specialized items to many customers, rather than just concentrating on the high demand items which may not be what many customers actually want. Some customers may settle for something they don’t really want because the right item is too difficult to find, but they are happier when they don’t have to make that choice.
The long tail also applies to customers with limited budgets. Just using the Internet to make a greater variety of products easy to find may not be enough. The price may be prohibitive. Often, there are many more customers who would purchase the product if it were available at a lower price. Traditional stock-photo sellers generally ignore such customers, arguing that the cost of servicing them is too great. While these customers can be difficult and costly to locate, in aggregate they often represent a significant additional revenue opportunity.
To combat this problem, it has become common in the stock-photo industry to price items at levels that even the smallest user can afford. Microstock companies focus more on growing traffic and increasing market size—the long tail—than on maximizing revenue from any individual customer. A downside to this strategy is that traditional buyers are offered images for much less than they have formerly been willing to pay. But in theory, the increased volume of low priced sales will more than make up for any loss in revenue from those customers who could afford to pay more.
Another long tail challenge is in identifying these new potential customers. “If you build it, they will come” does not necessarily work. Low prices are not enough, if you have no plan for reaching out to new customers and letting them know the offer exists. Marketing to existing customers just lowers revenue without in any way helping you identify a new and totally different customer base. Alamy learned this the hard way when it introduced Novel Use. The company had a good product, and it was priced at a level a certain segment of users could afford, but Alamy had no plan as to how to tell these potential customers that the product existed. For the most part, these customers are not the same people who have traditionally purchased stock photos.
More on pricing and marketing issues in tomorrow’s “Pricing for the Long Tail.”