I just stumbled across one of the more interesting pieces of business thinking I’ve seen in a long time.
[VentureBlog]: Chris Anderson’s observation in a recent Wired Magazine article is that the 80/20 rule exists in the physical world because you chop off the long tail.
Because of the marginal costs of offering the items that don’t sell
big, traditional business focuses on the 20% of stuff/customers/etc
that represents 80% of the revenue. But what if marginal costs
disappear? What if the infrastructure enables economical delivery of
low volume items? What do you get?
You get iTunes, eBay, Amazon, and many more — and things we’ve yet to
see, or even imagine. The transformation of ‘economy of scale’ by the
internet (and other enabling phenomena?) may have just begun. (I
suspect this is also key to unlocking some of the ‘bottom of the
pyramid’ challenges we’ve been discussing below, and in related comments.)
Anderson’s Long Tail blog is billed as a ‘public diary on the way to a book’ — with a $500,000 advance to help it along, according to Halley (thanks!), who left the trail that led me to the tail.
What’s really amazing about the Long
Tail is the sheer size of it. Combine enough nonhits on the Long Tail
and you’ve got a market bigger than the hits. Take books: The average
Barnes & Noble carries 130,000 titles. Yet more than half of
Amazon’s book sales come from outside its top 130,000 titles. Consider
the implication: If the Amazon statistics are any guide, the market for
books that are not even sold in the average bookstore is larger than
the market for those that are (see ‘Anatomy of the Long Tail‘).
In other words, the potential book market may be twice as big as it
appears to be, if only we can get over the economics of scarcity.
Venture capitalist and former music industry consultant Kevin Laws puts
it this way: ‘The biggest money is in the smallest sales.’