I am sure almost all of us would have heard about the long tail (skewed normal curve) ever since the present financial crisis has been in news. This is with respect to unanticipated risk and the kind of losses it might create. However, what I am talking about here is another long tail, that of products and their customization.
The companies in their quest to capture all consumer surplus have tried to produce more products, services and their variants to suit the needs to each and every consumer. e.g. One American telecoms company, offering a wide range of packages for different consumer groups, was reckoned to have 377m different possible combinations of its services, many of which, of course, were never requested.
This is the concept of the long tail, discussed by Chris Anderson in his book “The Long Tail: Why the Future of Business is Selling Less of More”. The basic idea is that if we plot a graph of the products/services of a company on x-axis and their sale on y-axis it presents a long tail, since more popular products form the peak while the less requested, though more in number, have lower sales.
A recent Economist article talks about the same phenomena.
Given the current economic scenario does it makes sense for the companies to move so much towards product innovation or have companies landed in trouble due to offering too much variety and hence increasing their cost structure. This approach might make sense in case of e-commerce solutions where the S&A expense can be significantly reduced and hence increase the variety but does it make sense for physical products delivered through traditional channels. Is it time that we should adopt Ford's T-Model theory or something like what Apple does - more product innovation but very commoditiesed?
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Interesting article... But I think the most fundamental analysis that a company must do before trying to cater to the long tail is the breakeven analysis. The extent of sensitivity the profits have to the changes in volume sold around the breakeven point will determine how risky it is to keep stocks of less popular products.
ReplyDeleteIn general, the long tail strategy makes sense in places where the incremental cost of production and storage are negligible as compared to the benefits in terms of extra premium that can be charged.
Finally, in a scenario of economic downturn, companies that have a larger number of SKUs are always going to be hit first because few customers would be ready to pay a premium for customization. I would rather prefer having a black Ford-T for 20% lesser price than a car whose color is of my choice. These indulgences are better left to boom times.