Browsing kottke.org this morning, I came across the term “Long Tail business”. Curious, I started searching around to find out what the term meant.

The term first appeared (I think) in Wired Magazine in an article by Chris Anderson called, well, The Long Tail. The idea is that while traditional media has been based on “hits”, that sites like Amazon, iTunes and NetFlix are finding high profitiability and lower margins by offering “niche” products along side the typical “hit” products.

Essentially the idea, in my mind, boils down to this. There some demand for everything. Businesses like the ones mentioned above are seeing a lot of demand for niche products that aren’t necessarily mainstream hits, but because they have been made available, people are buying them.

Chris presents the following graph as a picture of the Long Tail:

The large red spike to the left is the mainstream demand. The yellow signifies the niche markets. The theory is that the yellow line goes infinitely to the right, and while the demand for these products may not be as high as the ones on the left, there will always be demand for them somewhere, because they are there. Services like iTunes can service these niche markets because the cost of “stocking” the product is a matter of disk space and bandwidth, while Amazon services the niche products differently with a used bookstore network (and therefore doesn’t necessarily have to stock the product). The ability to address these niche markets without dramatically increasing stocking costs means more sales, because no matter what it is, someone will want to buy it. Linking niche products to mainstream products via “Those who bought this also bought …” type of recommendations increases the visibility of these products.

The theory is very interesting but I’m sure I’m not doing it justice. For an explanation that actually makes sense, I would recommend reading the original article and then hitting Chris Andersons blog.