Executive Briefings

Re-Thinking the Long Tail Theory

New research from Wharton challenges current thinking on the Long Tail effect.

The Long Tail theory suggests that, as the internet makes distribution easier -- and uses state-of-the-art recommendation systems that allows consumers to become aware of more obscure products -- demand will shift from the most popular products at the "head" of a demand curve -- as charted on an xy axis -- to the aggregate power of a long "tail" made up of demand for many different niche products.

The Wharton researchers find that the Long Tail effect holds true in some cases, but when factoring in expanding product variety and consumer demand, mass appeal products retain their importance.

According to the report's author Serguei Netessine, Wharton Operations and Information Management professor, the Long Tail effect may be present in some cases, but few companies operate in a pure digital distribution system. Instead, they must weigh supply chain costs of physical products against the potential gain of capturing single customers of obscure offerings in a rapidly expanding marketplace. Companies, must also consider the time it takes for consumers to locate off-beat items they may want.

"There are entire companies based on the premise of the Long Tail effect that argue they will make money focusing on niche markets," says Netessine. "Our findings show it's very rare in business that everything is so black and white. In most situations, the answer is, 'It depends.' The presence of the Long Tail effect might be less universal than one may be led to believe."

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New research from Wharton challenges current thinking on the Long Tail effect.

The Long Tail theory suggests that, as the internet makes distribution easier -- and uses state-of-the-art recommendation systems that allows consumers to become aware of more obscure products -- demand will shift from the most popular products at the "head" of a demand curve -- as charted on an xy axis -- to the aggregate power of a long "tail" made up of demand for many different niche products.

The Wharton researchers find that the Long Tail effect holds true in some cases, but when factoring in expanding product variety and consumer demand, mass appeal products retain their importance.

According to the report's author Serguei Netessine, Wharton Operations and Information Management professor, the Long Tail effect may be present in some cases, but few companies operate in a pure digital distribution system. Instead, they must weigh supply chain costs of physical products against the potential gain of capturing single customers of obscure offerings in a rapidly expanding marketplace. Companies, must also consider the time it takes for consumers to locate off-beat items they may want.

"There are entire companies based on the premise of the Long Tail effect that argue they will make money focusing on niche markets," says Netessine. "Our findings show it's very rare in business that everything is so black and white. In most situations, the answer is, 'It depends.' The presence of the Long Tail effect might be less universal than one may be led to believe."

Read Full Article