Death of the 80/20 Rule & the Rise of the Niche Market

5 04 2007

How big profits are driven by recommendations and customer participation

Based on the article “The Long Tail” by Wired magazine Founder Chris Anderson

In the old days, the world lived by the “Pareto Principle” (circa 1906) – “20% of the customers make up 80% of the profit.” Mass marketing has earned its living by this rule. It has always been about the mega hits – film, music, books, etc. Everything from product development to marketing focused on bringing one to market. Shelf space and now web space made up the prime real estate and directed you to them.

Anderson called this the world of “scarcity” where content producers controlled what you could see, listen, touch, feel, or smell. You had fewer choices. You had less means to find alternatives. We basically had to take what came our way from producers.

And then came…Amazon
And then came…eBay
And then came…iTunes
And then came…Netflix

And the new world of “abundance” came to be. Suddenly you could fulfill your own personal need for anything. You could have it when, where, and how you wanted it. And find a price that you could afford.

So it seems what we thought we knew about product design and promotion was really based on market inefficiencies. A new economic model arose that offered unlimited selection revealing what people really wanted not what producers sold them.

People are using the web to dig deep into content they want. They discover that they do not have mainstream tastes. They discover they can better control how to fulfill their unique needs on their own through services that help them on their quest.

How did this happen?

The old ways were based on the physical world. Producers would only carry or offer what they could afford to produce or stock. Audiences were mostly “local” (geographic or to the topic).

But how do you make money on the other 80%- those outside the “mainstream?”

Answer the following…

What percentage of the top 10,000 titles in any online media store (e.g. Netflix, iTunes, Amazon,etc) will it rent or sell at least once a month?

Did you say 20% (or 2000 titles)?

The correct answer is…99%

How’s that?

Rhapsody is a subscription-based streaming music service offering over 735,000 tracks. The most popular tracks are the first 40,000, but over 400,000 are played monthly.

At Amazon, more than half of its book sales come from outside its top 130,000 titles. This means the market for books on Amazon that are not sold in the average book store is larger than the market of books that are.

Moral: A market may be twice as big as it appears to be in the world of “abundance.”

The lessons of an abundant market is that you don’t need to produce a “mega hit” in order to make money in a digital world. “Misses” can make money too if you have lower production and inventory costs that can bring the point of making a profit down. This makes the cost of producing a “hit” or a “miss” the same.

So popularity no longer “exclusively” defines profitability.

Old world models will have to change in a big way.

This phenomenon is called “Long Tail.” Driven by customer recommendations and customer participation.

Long Tail

The most successful web businesses today play this game. Google makes its money off small advertisers. eBay sells niche and one-off products.

Anderson offers the following rules to live by:

Make everything available – it’s often more expensive to evaluate then to release “as is.”
Cut the price in half then lower it of existing stock– price according to digital costs and remember it has already made its money back or has been written off. Imagine if prices were lower the further you went down the “long tail” curve.

Customers value “convenience” versus the struggle to find it for free and are willing to pay for it so help them find it and use it.

Create as many “points of entry” for the buyer as possible. Lead them to it. Provide listings and tools for “followers” and “influencers.” Create human peer “interactors and guides.” Offer selected database or collaborative “filters.”

Think of your customer experience. Why cant members or nonmembers have open access to online community to attract and then foster customer conversation around your products? Or mix and match articles or proceedings from different titles to create an “issue”? Or interact with product developers to create what they really want? Or attend conferences without having to be there? Or place a personal order for what they need and have someone create it? Or find peers who can help them solve their unique problems?

Treat people as individuals. Give them a customer experience that helps them find solutions.

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