The Long Tail and Small Business

Harvard marketing professor Anita Elberse has caused a stir with her Harvard Business Review article "Should You Invest in the Long Tail."  The article argues that several parts of Chris Anderson's popular Long Tail theory are wrong.  Key quote:

"It was a compelling idea: In the digitized world, there’s more money to be made in niche offerings than in blockbusters. The data tell a different story."

The article has an excellent summary of the long tail theory, so I won't bother covering it here.  But the bottom line of Elberse's research is that for the two markets she studied - online music and home-video sales - the long tail effect as described by Anderson did not show up.  Her data indicates that hits may even be gaining relative share instead of losing share as predicted by Anderson. 

We've spent a lot of time looking at niche markets, small businesses and industrial structures.  Interestingly enough, we think Anderson and Elberse are both right.  Our research shows that the long tail is happening and the number of niches able to support small businesses (or niche products from big companies) 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 - as shown in orange in the chart below.  This chart is taken from the HBR article.

While the long tail theory and Elberse's article focus on companies aggregating long tail demand, we are seeing a growing number of successful small businesses that serve narrow long tail niches. An example is My Beating Heart, a pillow company we've profiled in the past.  They serve a very narrow specialty niche way down the US pillow market long tail. According to their founder, the company wouldn't exist without the use of Internet based marketing to reach their customers.  They also would not be able to make their product at a price low enough to attract customers without outsourced manufacturing and services.  They are a long tail small business.   

At the same time we agree with Elberse's research showing that hits will continue to be important.  We think this is true for both digital and physical goods.  So while economically viable niches will grow in number, hits and highly successful products will continue to garner large relative market shares. 

The market share losers, in our view, will be products caught in the middle.  These are products that aren't hits, but also aren't unique enough to be niche products.  We see customers moving away from these products on a relative basis, creating in many cases an even steeper demand curve than shown in the chart above. It is important to note that while mid level products will lose relative market share, the overall growth and size of the global economy means these products can still be successful. 

The growth of long tail niche markets is creating many new opportunities for small businesses.  We also are seeing a strong trend towards large corporations partnering with small companies to serve niche markets, instead of trying to aggregate long tail demand on their own.  We cover these trends in more detail in The New Artisan Economy research report.

 

   

Comments

[Jüri Saar]

Chris Anderson commented to Elberse's article here:

http://www.longtail.com/the_long_tail/2008/06/excellent-hbr-p.html

and some additional commentary on the issue from Tyler Cowen:

http://www.marginalrevolution.com/marginalrevolution/2008/07/has-the-long-ta.html