Long Tail Business Model

Just the internet can’t make long tail business model work

The review meeting of a start-up was on. The food delivery business was struggling; it had burned nearly all the cash that an angel investor had invested. The investor was trying to understand what had gone wrong. The founder-CEO explained that tie-ups, that were about to take place with a leading restaurant chain and a local food joint, had fallen through. Their corporate customer had found cheaper quotes from a local service and had stopped ordering food from them.

“What happened to your Long Tail model?” the investor asked. “How come you’re dependent on only one large customer?”

The missing long tail

Let’s go back to where it all began. The start-up was formed with the help of likely business from a corporate customer and tie-ups with a few restaurants in an area. The founder-CEO had planned to ‘scale the business using a Long Tail model’, which basically meant selling niche food items sourced from specialty kitchen to individual customers.

He had presented this idea to incubators and executed a few orders using web-based software. He got the backing of a well connected angel investor and started rolling — they hired space, a large team and even launched their app.

But soon, they realised it wasn’t easy to win the trust of retail customers, seeing as how specialty kitchens aren’t all that well known. So to meet ‘numbers’, they tied up with a big corporate customer and a few caterers. They had hoped retail customers would eventually jump in too, but it didn’t happen. Most of their efforts went into servicing corporate customers, ironing out supply and billing issues, and collecting payments.

The Long Tail was nowhere to be seen.

The ‘animal’

So what is this phrase?

Long Tail is used to describe a retailing strategy, where a large number of unique items are sold in relatively small quantities (the “long tail”). This is usually in addition to selling a few popular items in large quantities (the “head”).

The start-up was still figuring out the ‘head’ or the ‘torso’. A graph with Y axis showing demand (quantity) for each item and items (called as SKU or Stock Keeping Unit in retail jargon) on X axis arranged in descending order of individual demand, appears like a dinosaur (not exactly), with head high up on Y axis and tail stretching far on the X axis, which gets thinner as it stretched.

The shape of animal — height of its head, thickness of its neck, and length of its tail — will naturally depend on the kind of items we are talking about; movies, books, apparel, mobile phones, groceries, medicines or lenses.

Brick and mortar

If you go to a bookstore, you will find bestsellers displayed right in the front. Inside, books would have been arranged in various categories in shelves along the aisles. The shopkeepers won’t tell you this, but even these paperbacks and hard bounds are selected based their popularity. You may find some books placed in inaccessible places, which haven’t been sold for a while. They will most likely be disposed of in the upcoming end of season sale. If you want a book which is not currently popular, you may not find it.

However, your boutique bookstore may stock selected books based not on high demand but on the needs of its regular customers or owner’s tastes. However, you may still need some persistence to get the book you need. Besides, you may not always know that you need book until you see one.

The Amazon story

The above story was a repeat in almost every business; that is, until Amazon came along. Digital technology, internet, and its marketplace model made it possible for Amazon to sell not just popular items in large numbers (the head), but also sell a variety of items in small numbers (the tail). Studies have show that a large proportion of Amazon’s book sales come from obscure books that aren’t easily available in brick-and-mortar stores.

Most successful Internet businesses have used long tail as part of their strategy, including eBay (auctions), Yahoo! and Google (web search), Amazon (retail), and iTunes Store (music and podcasts). Alibaba and Indian e-retailers like Flipkart, Snapdeal, Shopclues and other such stores can also be included.

But the important thing to remember is that not all retail businesses have significant ‘long tails’. Not all them are encourage the long tails as strategy.

Serious business

It is obvious that if your customer can get special items from you without any hassle, he/she will return to you for popular items, even if they are available everywhere.

It takes some serious thinking, investments, and time to establish a long tail business. Such businesses need to invest on supply side for lower cost of storage, distribution, quality, delivery reliability, returns, and transaction costs.

On the demand side, long tail businesses must invest to lower the cost of search and discovery, sampling, evaluation (reviews), ordering, returning, transaction costs, as well as demand forecasting and shopping recommendation capabilities. Long tail businesses need investments in big data and analytics.

Alibaba invests in supporting artisans and tradesmen in far flung places to come together and form supplier groups to deliver unique items. It invested in long tail suppliers and manufacturers to create and fulfil demands of a long tail customers as well.

Coming back to our food delivery start-up problem, you now know why it couldn’t establish a long tail model.

 This article was originally published on Hindu Business Line website here
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s