Serving The Long Tail

If you're working for a company, chances are that your company falls into one of two categories: Business-to-Business (B2B) or Business-to-Consumer (B2C). In the past, the way this normally has worked is similar to the auto industry. The Original Equipment Manufacturers (OEMs) - think GM, Ford, and Toyota - are the B2C companies selling their product to end consumers. These companies do the final assembly of the car and build consumer brands. The OEMs are supplied by several tiers of B2B companies - businesses that serve other businesses.

Generally speaking, Tier 1 suppliers are big and the companies who supply the Tier 1 suppliers (these are called "Tier 2" suppliers) are smaller than Tier 1 suppliers. Tier 2 companies are supplied by Tier 3 suppliers who are even smaller then them. You can think of it this way: the OEMs are the biggest fish and they use stuff supplied by smaller fish, who are supplied by smaller fish, and so on. That's just the way it was back then.

In today's sort of world, it's hard to go out on your own (and say, be an independent car maker) because when you're a big fish you have the benefits of scale. When you're a little guy you have to do all your own hiring, all your own sourcing, all your own marketing, and so on. In a nutshell, when you're a little fish, it's hard to compete because you can't spread fixed costs out across a big, big business.

This is all changing, now, though. It's becoming easier and easier to make it as a "little fish", if you're in an industry with a long tail.

Serving the Long Tail

There are lots of industries that have a handful of big companies and thousands of small players. In this sort of industry, the thousands of little players are called the "long tail." As I've mentioned above, the companies in the long tail don't have the benefit of scale to spread out fixed costs. In theory, someone could make a ton of money by providing a service to all the little fish in a long tail industry. This opportunity has existed for centuries.

This is hard however, because it's not trivial and is often expensive to serve thousands of customers simultaneously if you're a small company.  Coordination costs make it difficult to serve the long tail.

But all that is changing. Digital technology is making it possible to dramatically cut coordination costs. Thus, it is now more possible than ever to serve the long tail. Lots of companies are now serving the long tail, here are a few examples:

Kickstarter - The market for creative goods (e.g., video games, movies, gadgets, etc.) are often dominated by big players. One obstacle to being an independent player in the creative goods market is the difficulty of finding funds and the difficulty of attracting a customer base. Kickstarter helps independent people making creative products do both.

Amazon Web Services - If you're a software developer, you need server space and computing power to run an app. This stuff, historically, was only accessible to big companies with deep pockets. Now, Amazon Web Services and other cloud storage and cloud computing providers make it affordable for independent developers and small software companies to get their prototypes off the ground.

Elance - Large companies gobble up talent and do many things in-house. It was hard to be a freelancer (whether it be in writing, publishing, marketing, consulting, etc.) because you couldn't find clients. Now, Elance is one of the many services that allows talented professionals to find clients, and avoid selling out to big firms (or even small ones). At the same time, small companies now have unprecedented access to skilled professionals, often for short-term jobs.

Castle - There are a few big property management companies. But most landlords aren't big, and there are LOTS of small property managers who own and manage real estate. The cool dudes at Castle are working on a product to serve these folks. Oh, and, even more awesome...they're Detroiters!

The Opportunity Of Serving The Long Tail

For a long time independent companies / freelancers have been woefully underserved, because the costs of serving can't sustain profitability. But now, because of digital technology, it's suddenly becoming possible. If you're a clever entrepreneur, one way to be very successful (and feel great because you get to serve an underserved market) is to do the following. I'm focusing on B2B companies in this post. But, the same logic could be applied to B2C companies. Also, if you're interested in serving underserved companies through business, check out the Base of the Pyramid Strategies work being done at the Ross School of Business. (I'm taking a class on this next term, I'm stoked).

Anyway, follow these steps:

1. Find a market that has a few large players (because this indicates that there's money to be made there) but that is also highly fragmented by loads of small or independent players.
2. Understand the needs of the independent players. How are they being underserved?
3. Of the needs you've identified, pick one that can be addressed with a solution that mitigates coordination or other transaction costs. This is likely a cost that larger players can afford to do in-house and is solvable using digital technology*
4. Build the product / service
5. Take it to market

If you start thinking about it, you'll likely think of many, many, industries which have a long tail AND which have a long tail that can be served via digital technology. Let me know if you make it big.

* - If you're looking at a solution (like Kickstarter or Elance) you have to consider the needs of anyone interacting with the independent players. In the case of Kickstarter, for example, you can't just make sure the people making the creative projects are having their needs met, you also have to incorporate the needs of the crowd funders when building the solution.