Chapter Thirty Six

The Long Tail

The virtual world provides many opportunities to purchase almost anything we want at any time on various websites and apps. Although online shopping may be more convenient, shoppers still prefer to make their purchases inside an actual store, new research finds.(Feb 2015) Nearly 40 percent of consumers make purchases inside a physical store at least once a week, compared to just 27 percent who do the same online, according to PwC's annual consumer survey. Even though online shopping may be easier than going to a store, many different factors are driving shoppers' decisions to make the trek out to a store. The research found that 65 percent of consumers said they shop in-store to avoid delivery fees, while more than 60 percent said it allows them to have the item immediately. Additionally, 61 percent said they like trying on the item or seeing it in person before buying it - Learn more at: businessnewsdaily
Recently, Amazon has begun to offer groceries online with Amazon Fresh. This will be interesting to follow because currently only about one percent of groceries in the United States are sold online. Why is this? We need to look at the significant frictions. First of all there may be the issue of delivery time as that is often one barrier to getting things online. Of course our friends at diapers.com can get us diapers by 6 pm in the United States as long as we order them by 9 am on the same day. For some folks, even that may be too long of turnaround time. The second issue that prevents people from buying online is some uncertainty about the fit, feel, texture, quality, and color of the products. Similarly, how will food items purchased online taste? It turns out there are ways to overcome some of these barriers.
Bonobos guide shop
Bonobos attempt at reducing the friction from buying online. Special outlets where the customer can try on or be measured.

The second barrier that prevents folks from purchasing online is the uncertainty about the quality of the item that might arrive when it is delivered. Another issue that is commonly voiced by consumers with the virtual world, is the cost of returning things, even when free two-way shipping is provided. Keep in mind that despite the fact the internet is a great liberator and offers all sorts of options, most of what still gets transacted is conducted in the offline world. Both the online and offline worlds will continue to coexist like this for some time to come. An interesting study in academic research was conducted by two professors in Toronto. They examined sales at Amazon.com in various zip codes around the United States and whether or not those sales would be influenced if a physical store were to come into the neighborhood. For example, there aren't any bookstores for those who live in Detroit, MI, zip code 48202, and all of a sudden a bookstore opens in that area, how would this affect sales at Amazon.com, if at all? If the thought is that sales at Amazon might go down because some customers might now be encouraged to walk across the street and purchase books, that would be absolutely right.
When a physical world store opens up in a zip code, virtual world sales do go down, but not necessarily for every product. Sales may decline for the popular products as it is safe to assume those items will be in the physical store. For instance, if you wanted to buy Harry Potter and the Sorcerer's Stone, more than likely that book will be in stock at the local bookstore. Researchers confirmed that the opening of a real-world store in a particular zip code causes Amazon sales to fall for popular products. If consumers were looking to purchase a less popular book entitled 101 Years of All Black Trivia, chances are the physical store would be unlikely to carry this title because of the low demand. This leads to the concept called the Long Tail, an interesting idea about how the mix of products and services sold over the internet change when customers are offered more variety.
Long tail is the concept which details how online and offline come together. The idea was developed by Chris Anderson who wrote The Long Tail, a book elaborating on the entire concept. Keep the following key ideas from Anderson's book in mind as we discuss how the internet is changing our behavior with respect to both selling, shopping and buying. The long tail contains two axes, a y-axis and an x-axis. The y-axis is a measure of popularity, which in many cases is going to be the sales of the product. It could also be the number of downloads or the number of people who follow somebody on Twitter, as it is simply a measure of popularity. On the x-axis, products are lined up from the most popular product all the way down to the least popular product. A common example is all the books that are available for sale on Amazon.com, perhaps five million of them, something a physical store could not handle. The top-selling book on Amazon for 2014 was “The Invention of Wings” by Sue Monk Kidd and way down the tail, at rank 3,900,000, there could be a much more obscure book about gardening in Detroit. The premise of the long tail indicates the products that are way out in the yellow area to the right are so unpopular, or so niche and slow to turn over, that it just wouldn't make fiscal sense for a physical bookstore to sell them.
On the other hand, products on the head are the ones that we would want to stock if we had a physical store as those are the ones that will sell the most. The distinction between the head and the tail is the key idea of the long tail. The internet makes it possible to have access to all of those products in the tail. In fact, depending on the aggressiveness of the seller, the total sales and profits from the products in the tail can really add up to be quite a lot. The following is a condensed version of background and history. Historically, pre-internet at least, we all lived in a world filled with so-called hits known as blockbuster movies, blockbuster music albums and so on. Firms were motivated to try and produce those blockbusters as folks were buying and consuming anything that was considered popular. However, the internet changed the economics of distribution as more variety than ever before is currently available.
The long tail maintains two different perspectives on the supply side and the demand-side. Both of these perspectives are equally important when we consider markets. As a result of the internet on the supply side, sellers supply an extensive amount of variety, whether the items are books, clothes, flowers, movies, songs and so on. The economics of distributing products has changed so much that virtually anything is available for purchase on the internet. Next, there is a demand side explanation for the long tail that goes along with it. In the days before the internet, people would learn about unusual products and services through friends, family, acquaintances and other more traditional methods. At times people may have lacked an understanding of those products or were unable to come into contact with them because retailers did not carry them or their networks wouldn’t know about them. Remember the retailers only carried products that were in the head and locating products in the tail was very challenging. Today consumer preference has become more eclectic as we have unlimited access to a vast array of products. Now we can compare and contrast the economics of the long tail with the older economic ideas that are still pretty useful but have withstood the test of time.
In 1897, Vilfredo Pareto noticed that about 80% of all the wealth of the UK was owned by only 20% of the citizens and residents. More recently we have often discovered that 80% of the profits earned are based on only 20% of the products sold or 20% of the customers that we have. Hence the common 80/20 rule. The long tail changes that rule because it’s not necessarily 80/20. A large tail of product numbers that actually account for individually very little profit, but collectively add up to quite a bit.
Zipf's law is another interesting law named after George Zipf. He discovered that if we look at a manuscript or a book, the word that is the second most used word in the book is utilized about half as frequently as the most popular. In a similar fashion, the third most commonly used word is used about one–third of the occurrences as the most popular one. Also, this law applies to other concepts such as the distribution of populations within a country. These are two key principles that really underlie this idea of the long tail, and surface again when we discuss preference isolation.
The tyranny of locality indicates that local items available for sale are dictated by whatever the local sellers decide to offer and they may differ from personal taste. Consider for example, a product we prefer to use but cannot find locally because it is just not popular among the local neighbors. For instance, that special lotion for sunbathing is not available locally because most of the pharmacies in the area only carry high SPF products and that does not include the special lotion. Products not available locally are going to be a demand-side explanation for the long tail, as the variety will be accessible via the internet. Think about the seller on the supply side who has an unusual product, that wants to sell that product?
The product mentioned in Anderson's book is an excellent movie called Once Upon a Time in India. To view the movie on physical screens in the United States would require traveling to large cities such as Los Angeles or New York where there are high concentrations of people from India or people who have an affinity with Indian culture. Because of the costs involved, it is impossible to show the movie to two and three people in different markets all over the country who actually would be interested. Online today the movie is available for download, and even if a few people watched the movie here and there, little by little, it would certainly add up to a lot of demand.
Based on these two examples the long tail addresses both demand for product and the supply. The wide assortment that is available today affects the manner in which products are being supplied. Looking at the diagram, there are two additional highlighted points and two more questions to try and answer. The head is in the red and the tail in the orange. The first question is how satisfied would we be with a random product that we drew from either the head or the tail? The random product may be one of those fantastic movies from New Zealand called Lord of the Rings. Given the popularity of this movie, if we randomly sort, odds are we'd be quite happy with it and might rate it eight out of ten. On the other hand if we drew a really obscure unpopular movie from the tail, chances are we probably wouldn't like it very much.
Generally, as we descend from the head to the tail the average level of satisfaction declines. This is just the average and variance is also very important as there may be a product in the tail that the majority of people do not like, but someone may really like. Ideally, if there were an efficient way for that person to filter and get into the long tail, they would probably discover products they really love. On average as we went from the left to the right our satisfaction would be declining when shown a random product. In contrast, our satisfaction would easily climb upward if it were possible to go into the right and find the things we wanted.
The internet has provided unique opportunities for artisans. With low operating and distribution costs, a person or business selling items in the knee of the curve can make a good living by creating a zealous group of followers. A friend is refurbishing used sewing machines and selling them at a profit through Craigs list and eBay. At a profit of $200 to $300 a machine, he can make a nice income. The photographer introduced in the chapter on social media uses Facebook to connect with customers that like Micro photography. He has repositioned his business from selling 100% at Art fairs to 50% art fairs and 50% teaching classes. On the supply side the seller at a low cost can promote himself and his products using growth hacker techniques. And shoppers can easily seach for those unique products.
Continuing with these ideas, what are the main characteristics of the long tail? First, the ratio of niche product sales to big hit sales is changing. Demand increases as a result of those niche products being added together. The long tail is just culturally unfiltered by scarcity. Also, the distribution efficiency is progressing as people can access content-type products on tablets and phones. Consumer reviews have an influence in terms of what is available in the long tail. In the past, the owner of the store would decide what was going to be offered on a local market. Theater owners would decide what movies they would show on the screen and store owners would determine what beer would be available in their liquor store. Now, all of these choices are readily accessible via the internet.
Selling on Amazon is basically like having your own online store. But it is so much better than that! When you are an Amazon seller, you get the benefits of being a large corporation, without all of the headaches. Once you list products on Amazon.com you automatically get exposure to the millions of customers that Amazon has already. Once you are selling on Amazon, you will show up as a third party seller on their website. You can sell on Amazon in 2 different ways. One is selling on Amazon as an FBA (fulfilled by Amazon) seller or MF (merchant fulfilled) seller. Using Fulfillment By Amazon (FBA) is the way that we recommend anyone who wants to sell on Amazon get started. The biggest benefit is that Amazon is doing all of the fulfillment for you. Here is what it looks like when you have a business selling on Amazon FBA:
  • You find a product to sell on Amazon.
  • You list the product on Amazon.com (does not go “live” at this point).
  • You prepare the items to be sent to Amazon’s warehouses.
  • You ship the items to Amazon’s warehouses.
  • Amazon unpacks and stores your inventory for you.
  • Your product shows up live on Amazon.com (according to where you listed in step #2).
  • Your product is featured as a Prime Eligible purchase.
  • Amazon BUYER places an order from you.
  • The Amazon warehouse workers find and ship your product to the customer Your customer receives the product in 2 days (if they are a prime member) Customer is happy!
In the scenario above, your “work” ends at step #4, and the rest is handled by Amazon. You pay them a percentage of all sales and some handling/shipping fees. When Amazon is handling the Fulfillment for you, you are free to sell as many items as you want because you don’t have to worry about having time to process and ship out all of those orders! There is a key element that is missing from this process of selling on Amazon using merchant fulfill versus Amazon fulfillment, and that is having your products Prime Eligible! Amazon does a ton of marketing to get people to join their Prime Program. People spend $119/year so that they can have unlimited “free” 2 day shipping on items sold on Amazon.com. from:The Selling Family

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