Palm Desert, CA—Anheuser-Busch has tripled its drink offerings during the past 10 years, but not because the drinking population has increased or because there is huge demand for all of its products. Rather, the beverage manufacturer has increased its product offering because it’s chasing the “long tail,” or the idea that there is value in pursuing a large number of low-margin customers.
Chris Anderson, editor-in-chief of “Wired” magazine, told eTail 2007 attendees Wednesday during his general session about the long-tail phenomenon that it’s profitable to respond to customers on a “one size fits one” model rather than the traditional “one size fits all.” “There’s massive demand for choice and variety,” Anderson said, noting that Anheuser-Busch’s gluten-free beer isn’t attractive to all beer drinkers, but for some it’s their drink of choice.
Like the 80/20 rule, the long-tail phenomenon relies on the principle that a few have (or want) a lot and a lot have a few. Looking at the long tail from the view of retailers, high-demand products receive shelf space in stores, spreads in the catalog, and plenty of space online. These products have a high cost margin because of the amount of space they occupy in each channel, so they don’t always work out to be the most profitable to merchants because of the amount of product merchants must sell to rationalize the costs.
Niche products with less demand, however, may not get any retail shelf space but only space online. These products have a low cost margin for merchants, which in turn allows them to offer even more products because of the money saved. The demand for these products at the long end of the tail measures the latent demand of what’s out there, said Anderson.
Using online music store Rhapsody as an example, Anderson explained that the vast majority of music available on the site (3 million songs total) isn’t available on the shelves of Wal-Mart (which stocks roughly 55,000 songs) and that 40% of Rhapsody’s sales are of songs not available at the big-box retailer. Comparatively, 21% of rentals from online movie giant Netflix aren’t available at Blockbuster stores, and 25% of sales at Amazon.com are for items unavailable at Barnes & Noble stores.
“We assume that if we can’t find it on the shelves of Wal-Mart that the demand is insignificant, but that’s anything but the case,” Anderson said.