Written by Fernando Maciá
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Demand is made up of people who prefer products that are in fashion and people who prefer less popular products. The two demand profiles add up equally to 100% of the pie, but only one piece of the pie is easy to cut. Do you know what that piece is?
In 1906, Italian economist Vilfredo Pareto created a mathematical formula to describe the unequal distribution of wealth in his country, noting that 20% of the people owned 80% of the wealth. Pareto’s Law reminds us to give preference to the 20% that matters and produces 80% of the results. The 80/20 rule also applies to sales where it is stated that 20% of the customers produce 80% of the profits or that 20% of the products derive 80% of the total sales.
This 80/20 law leads us to the search for the niche that generates profitability, that generates value.
The latest practices in data intelligence and CRM have made it easier for us to identify each of the products or services that make up our portfolio in order to filter out those that generate higher sales or a higher level of profitability. However, what about the forgotten repertoire of products that are not so in demand, is it really a good strategy to discard this group of not so popular products?
If we all know the famous Pareto’s Law, we will try to sell the most popular products and that is where the competition will be toughest. Michael Porter recommends that one of our competitive strategies is to differentiate ourselves from our competitors. One of the ways to differentiate yourself may be to focus on selling products or services that are not so popular, the so-called “rare products”.
The Long Tail Theory
In 2004, a very interesting business model theory called Long Tail originated. According to this theory, in some sectors 50% of sales originate from not-so-popular or rare products. These products are what are known as the products at the end of the queue or Long Tail products.
Let’s suppose we have a video club that is made up of a catalog of 5000 movies corresponding to 1000 different titles. If we look at the daily sales statistics we will find that out of every 100 films sold per day, about 50 belong to the 10 blockbuster titles and the other 50 belong to about 40 titles that are documentaries, classics, independent films, i.e., titles that are not so well known. The Long Tail invites us to identify those 40 rare titles that originated the other half of the sales.
The Long Tail in e-commerce
E-commerce portal Amazon derives 50% of its revenue from book sales from titles that are not the usual bestsellers.
Why do people buy on Amazon? It will be because they can get certain book titles that are not available in any bookstore on the street. Another good reason to shop at Amazon is their competitive prices, a direct result of their low storage costs. This cost reduction is only possible through its Internet business model based on the Long Tail.
The Internet has allowed many companies to take advantage of the benefits of the Long Tail. The first requirement for applying this theory is based on the creation of a broad product portfolio. To have rare products we must have a lot of stock. For a physical store, having a wide range of products is synonymous with higher warehousing costs. For a Web portal, warehousing costs rarely grow in large proportions with the increase in product stock.
Additionally, the Internet allows us to show in great detail each of the hundreds of rare products we have, while in the case of a physical store, making known all the unpopular products involves huge investments in showcases, furniture and merchandising.
The Long Tail in Search Engine Optimization
In the field of search engine optimization (Google, Yahoo, MSN) the Long Tail theories are the basis of many successful strategies. The objective of search engine promotion is that a Web site receives the highest number of visits from users who use search engines through the use of keywords to search for specific information. For example, the Venezuelan Yellow Pages Web portal on the Internet receives 20% of visits from users who have typed such frequent phrases in search engines as “yellow pages”, “electricians”, “Venezuela hotels”, “florists”, etc. The other 80% of the visits through search engines come from more specific or rare keywords such as “electricians 24 hours in Caracas”, “florists with home delivery service” or “hotels for executives in Caracas”.
What is most interesting about this phenomenon is that the visit/customer conversion rate for rare or specific words is much higher than the conversion rate for popular words.
More examples of Long Tail
In the United States, between 1961 and 1986, several television series reached 50% of the audience share. After the famous Bill Cosby series in 1986, no other series to this day has been able to reach that mark. The answer is very obvious. In the last 20 years, the rise of new public television channels together with the birth of cable television has diversified the television audience. Each time the top-seller is losing ground to a group of rare products. Demand is diversifying, the queue is getting longer.
Continuing with the world of entertainment, a study analyzed the historical evolution of albums that have gone gold and platinum in the last 15 years. According to this study, since 2001 the number of albums that have obtained gold and platinum records has progressively decreased. Indeed, after maintaining between 800 and 1000 gold and platinum albums between 1994 and 2001, levels have been declining to 700 (2002) and 600 albums (2003, 2004 and 2005). This drop in sales of top-selling records has been a direct consequence of the birth of the Internet as a source of musical information, which has allowed us to listen to music that is different from what we often hear on the main radio stations. This statistic does not say that the record sales market has declined, it only tells us that it has diversified and that now the very large group of not-so-well-known records are selling as well as the very small group of top-selling records. Is the time for big hits over?
Making adjustments to our product strategy
In this article it is not recommended to stop selling what is most popular, what is most in demand, because if we do so we are leaving more ground to the competition. The purpose of this article is to talk about the benefits of rare products, about the entrepreneur who sees an attractive market in collector’s items or specialized products. We should not discard a priori that proportion of rare products that make up our catalog.
There is a long queue of rare products with their faithful demand, we just need to decide in which niche of that wide queue we are going to focus our business.
