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What is the long-tail business model? How does the long-tail business formula differ from the conventional business wisdom?
The long-tail business model is where a business sells a wide range of niche products/services instead of selling large numbers of high-demand products/services. The long tail formula seems to fly in the face of the common advice to focus on one niche product (in other words, to prioritize one thing and do it exceptionally well). Further, expanding your offerings according to the long tail formula could be the key to disrupting the market and winning big.
In this article, we’ll take a look at the concept of the long-tail business model and consider how it works in action using a real-world example.
What Is the Long-Tail Business Model?
Long-tail businesses focus on creating a wide variety of diverse niche products and services for interested buyers—individually, each of these products sells very little, but the combined sales of all of the products generate high revenues. These models require cost-effective ways to manage large inventories, reach potential buyers, and facilitate transactions. Further, long-tail businesses often encourage the co-creation of products by allowing individual users to produce and distribute their own creations—they need a powerful platform to facilitate this form of customer-business collaboration.
In their book Business Model Generation, authors Osterwalder and Pigneur suggest the following layout for long-tail business models:
|Customer Groups||Focus on multiple niche customer groups as well as multiple niche suppliers—both groups are interdependent.|
|Value Offer||Value comes from offering a wide range of niche products alongside a few mainstream products. Additional value comes from providing content production tools for users to co-create products.|
|Touchpoints||Online methods are usually the most cost-effective.|
|Interactions||Online methods are usually the most cost-effective. The level of interaction required depends on the nature of the products and services on offer.|
|Profit Sources||Profit sources will come from combined sales across the platform, as well as paid advertisements.|
|Resources||The larger the platform, the more of a resource it will become.|
|Critical Actions||Develop, manage, and promote the platform to acquire niche content suppliers and customers.|
|Network||Focus on developing partnerships with both professional and amateur niche content providers. In addition, focus on partnerships that will make the platform more functional or attractive to both suppliers and customers.|
|Expenses||Platform management and development will incur the highest costs.|
Case Study: From Mainstream to Long Tail
Changes in the publishing industry are a great example of the long-tail business model in action.
Traditionally, publishers had to print and distribute books to bookstores before they could sell them. This incurred heavy printing, inventory, and distribution costs. Publishing houses were responsible for managing the editorial, marketing, production, and distribution costs for each title they published. They had to carefully plan their publishing schedules for both their frontlist (books to be published) and backlist (books previously published) titles to make a profit.
To evaluate frontlist titles, they weighed the projected sales (what they expected customers to buy) against the editorial, production, and royalty costs the book would incur. They only approved books that seemed likely to make a profit.
To evaluate whether backlist titles should stay in print, publishers analyzed the book’s existing sales record to determine whether the book’s demand was worth the cost of printing further copies. If the publishers decided that the book was not worth printing, customers would have no awareness of this book or, if they did, they would find it difficult to find a copy.
In addition, brick and mortar bookstores had limited shelf space to stock books—they had to justify the inclusion of each and every title on their shelves. Therefore, the majority of bookstores stocked only the bestselling titles.
The fact is that publishers and bookstores didn’t really know what people wanted—limited resources pushed them to make assumptions about what people wanted and to fabricate demand through the use of mass marketing. In other words, customers bought these books because they didn’t have any other options.
Case Study: Amazon’s Long-Tail Model
Amazon’s business model disrupted the long-tail business model in two ways. First, it made more books available to customers through Amazon Marketplace. Second, it allowed authors to self-publish their own books through Amazon KDP.
Amazon Marketplace is not restricted by shelf space or inventory costs—print-on-demand facilities allow them to store books as electronic files instead of hard copies. Amazon creates demand for books that brick and mortar bookstores don’t have the resources to carry—it makes customers aware of a wide variety of books (based on buying patterns and preferences), creates demand by displaying customer reviews, and facilitates the purchase of these books. It’s interesting to note that more than half of Amazon’s book sales come from books that are not sold in traditional bookstores—Amazon created a new market based on books customers actually want.
Amazon KDP authors have the option of doing all of the editorial and design work for their books, or they can pay for additional services to manage and promote their books. This means that Amazon KDP doesn’t have to cover the editorial or marketing costs for publishing these books.
Since there are no inventory costs or author advances to pay, Amazon KDP doesn’t lose out financially if a book doesn’t sell. When a customer purchases a book, Amazon KDP prints the book and deducts this printing cost from the sale price of the book. So they only pay the printers and authors as and when a book sells, and all parties profit from the first sale. Millions of authors use Amazon KDP to self-publish books, and while they don’t sell every one of these books, the aggregate sales of all of the books allow Amazon KDP to thrive.
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- The nine elements that make up any successful business model
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