How to Make Money In The Long Tail

The Long Tail theory was developed by Chris Anderson, who first published the idea in 2004 in Wired magazine, and then went on to publish his 2006 bestselling book.   His theory was that when consumers were given unlimited access to variety of products (easy to do in an online world) – they would tend to migrate to more targeted offerings that were previously unavailable to them (in the “tail” of the sales curve).   While sales of individual products in the tail would be small, the huge selection would bring in more sales overall. It became known as the “profitable tail” in corporations as these items could be more profitable on a per unit basis.  The tail was a low volume, high profit model. And for retailers like Amazon, this confirmed their decision to extend the breadth of their offerings rather than consolidating around best sellers.  The Long Tail theory was counterpoint to the current market segmentation and portfolio approaches where high market share and high growth were the paths to profitability. 

An exciting part of Long Tail theory for the providers of these tail products and services was that the barriers of entry into markets would also be lowered in terms of investments in people, resources and discounting.  Business segments in which consumers want variety are the supposed winners.  Take recorded music and books as examples  - traditional publishing / distribution companies currently provide and promote limited variety, then achieve profitable market share dominance when sales exceed relatively high fixed costs.   Long tail thinking, however, says anyone can write an e-book, record an album, and be found on the internet.  Given access to much more choice, consumers would happily purchase something that perfectly fits their tastes rather than having limited choice. The democratization of the marketplace sounds great, especially if you are a smaller player.

The dilemma for the long-tail entries.  Entering a market as an unknown player using long tail-thinking can be treacherous.  The price that a vendor can charge if they are only playing in the long tail will gravitate to the costs of goods of the lowest cost provider, which eliminates any chances of profit for any of the players, or even worse, moves prices to zero of free.   If recording a piece of music or writing a book has no hard costs (other than the artist’s time and sweat), then pricing for these products will gravitate to zero.   Let’s say I was to try to charge people to read this blog.  My great points of view as well as my time and energy must be worth at least a penny or two, yet readers have too many other choices for quality content that is free (the tail in blogging is a very long one).

“Free” is a bad pricing model.  Working in the long tail is a labor of love, a hobby, maybe a fulfilling way to learn and dream.  But the laws of economics (pricing being a function of supply and demand) make it an unprofitable business.

The solution is to stand out.  Pricing leverage comes from offering truly unique, differentiated and remarkable products or services.  Author Seth Godin has been writing about pushing yourself to stand out in your chosen field (Read Linchpin and The Dip),  Mediocre is the risky middle ground that is expendable.  Standing out is no longer just a good idea, it is now an imperative.  Why?  It comes down to pricing power.  

Pricing power is everything.  To market products or services in the long tail, you must figure out a way to be a price leader – which means charging a fair price for something that is so unique that it has no equal.  This is a form of market share leadership – even if the market is tiny.  Make no mistake, Seth Godin, Chris Anderson, and even Amazon are market share leaders in their fields which allows them to charge money and make profits selling products.  The ease of entry into a category can be deceiving.  Offering what is already available, even if you do it really well, will lead to a lack of ability to charge a price that allows you to make money.  Focus only on what it takes to be the single best offering that will drive your market share to the top. 

TV and Internet Together Offer a Richer Viewing Experience

It has been predicted that the explosive growth of the internet and social communities would spell the demise of traditional forms of media – namely TV and print (magazines, newspapers).  But this trend has not played out. I came across some information that begins to confirm the other side to the story. There is actually an observed synergy between the two mediums. 

NBCUniversal conducted a study of people following the Vancouver Winter Olympics and the results were that those who both watched the Olympics on TV and followed on the internet watched twice as much TV as those who watched only on TV and did not use the internet, as reported by Sheryl Feldinger, the senior vice president of strategic marketing and metrics at NBCUniversal, at the BBM Stay Tuned conference in Toronto on March 30th, and printed in an article in the Hollywood Reporter. Viewers relived dramatic moments or looked to the personal side of the athletes online while watching live events on TV.  Younger viewers also watched three times more TV coverage when they were also engaged online.  

While, on the surface, this might look like another arcane piece of analysis for the media and advertising community, the results point to a larger insight.  Namely,  the future of the internet and TV may be one of happy coexistence, where TV programming and internet combine to allow a more satisfying overall experience.  For example, during a live TV program, the internet provides immediate access to do some behind-the-scene analysis for the program being watched.

TV is considered a “passive” media form, unlike books and print that require imagination and visualization (“active”) while reading. Now the “two-screen” approach can build interactivity into the platform to become an “active” medium where viewers have access to immediate in-depth commentary and search.  TV broadcasters (as well as print for that matter) have begun to build out programming and online linkage, but are only scratching the surface of bringing viewers a totally integrated “two-screen” experience.  The future of traditional media may depend upon how quickly they are able to create this new experiential media form.

How “Brand Vision” Leads to Brand Growth

Defining a brand vision is an often overlooked task within a company mostly because it is not well understood as to its purpose or usefulness.  Strong brands and companies, however, usually do have compelling visions.  The purpose of having a brand vision is to state clearly a direction for the brand,  allowing differentiation in the market, standing for a set of core values, and ultimately gaining a loyal consumer base and building strong market share.

What is a Vision Statement?

My simple definition -- a vision statement is a description (or snapshot) of the world, that has been changed by having your brand accomplish its goals.    In other words – once you have changed the world for your customer – what does the world look like?  That is a “vision”.  

Here is an example.  Microsoft, back in its earliest days (mid 1970s), had a vision for their company. 

"We started with a vision of a computer on every desk and in every home...

– Bill Gates
Chairman and Chief Software Architect

This was a radical statement at the time, as  computers were never in homes (they didn’t fit in terms of size or household activity).  Brilliant -- home computers would require stand alone software systems for these individual boxes (a key enabler).  See how the vision works?

I love some non-marketing examples.  Martin Luther King, Jr. famously stated, “ I have a dream - that my four little children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character.”  Wow – what a great snapshot of the inspiring side of vision.  John F. Kennedy said in the early 1960s that the US would have a man on the moon by the end of the decade.  While this was a bit more of an objective than a vision, its radical-ness alone made it a compelling vision. 

These statements (vision statements) were all unimaginable (at the time the were made) snapshots of the future for the the affected population (consumers), but inspired those who went to work on changing the world.  And, broadly speaking, these visions were achieved through the power of that inspiration.  Visions say nothing about how to accomplish this future state as that is not their purpose.

Why is Brand Vision Important?

A Brand, too, can have a vision and that vision can spark positive change in its direction and ability to satisfy the needs of consumers.  The point is to inspire and set the benchmark of how consumers live happier lives, have more time with their families, live on a more sustainable planet, etc. because your brand exists.   Today’s top brands have created loyalty, not only in delivering functional performance, but in ‘delighting’ consumers in their approach (2011 Brand keys Customer Loyalty Index).  A brand should clearly articulate the happiness, satisfaction or changed behavior in a world where problems have been solved by that brand having existed.  It is especially important in breakthrough ideas and new brands, but as the study also shows, mature brands can take advantage also.  

Key to Effective Vision:

1. Snapshot of a changed world
2. Simple, compelling and inspirational for the people who must work on the task
3. Has a specific date when that vision is realized
4. The brand should be inseparable and a key enabler to the realization of that vision

When a brand has a vision, the people working on it are inspired to change the world. That leads to consumers that are in love with the brand, and that leads to sustainable growth.

TASTYKAKE – the “Value” of An Iconic Brand

I grew up loving TASTYKAKE products.  They were a treat in our household and were often the high point of my lunch box.  Chocolate cupcakes were my favorite while my wife loved the Butterscotch Krimpets……yummmm. 

As many of us in the Philadelphia area know, the company has been under pressure lately. Costs of ingredients are way up, the new factory at the Philadelphia Navy Shipyard is up and running, but not yet realizing its promised savings.  And finally, a big customer, A&P and Pathmark, has declared bankruptcy. The company’s sales and gross profits are no longer high enough to cover their fixed costs.  As loans were coming due against big debt for the factory, Governor Rendell pledged $1 million of taxpayer money, over the $5.5 million obtained in private financing, to keep the company running while it explores strategic options.

The Value of a Brand

Successful iconic brands have built consumer loyalty by consistently delighting consumers.  TASTYKAKE certainly lives up to that measure.  Generations of consumers across the northeast, and especially in Philadelphia, would agree. 

A successful brand also has “value”.  That value is the intangible asset that that makes a company worth more  than tangible equipment and plants.  It allows a company to profit in a segment when the low-price competitor that has a lesser brand cannot command pricing, and profitability. Given this yardstick, TASTYKAKE might be loved and cherished in the memory of a consumer, but is not giving “value” back to its owner. 

Lets look at TASTYKAKE “Value”

These numbers from the company’s Published financial reports:

	2009	2008
Net Sales	$180.6	$173.9
Cost of Sales	$116.6	$119.2
% of Net Sales	64.6%	68.5%
Gross profit	$64.0	$54.8
GP % of Net Sales	35.4%	31.5%
Selling/overheads	$67.6	$62.2
% of Net Sales	37.4%	35.8%
Profit before tax	($3.4)	($7.5)

If you compare their 35% Gross profit to an industry “average” (I eyeballed about 5 other big food companies – remember, this is a blog) the gross profit is always north of 40% and the Selling / overheads is usually 30%) leaving 10+ points of operating income.   For TASTYKAKE bakery, its SG&A of 37% is too high and needs to come down. But the real issue is ultimately that the pricing they can command is not high enough to cover the true cost of making these wonderful products and is probably hindered by the strength of the trade and the strength of its competitors (Hostess and Entenmann’s, for example).  They really need to merge with a large company or at least pair with another midsized company to gain efficiency if they cant price higher.  Also, they need to optimize the product line for profitability.  Running a mid-sized bakery is not for the feint of heart.

This all brings home a hard truth about a brand.  Consumer love is extremely important, but should lead to creating “value” for a company.  The true measurement of strength is in translating consumer love into the ability to command sustainably strong profits and higher prices in the market.  

Philly is rooting for them.

Finding a Marketer in the Blogosphere

If you are like me, you did not grow up in a world in which blogs were a major source of knowledge sharing.   It could be that your reading patterns were established in the world of traditional media before blogging became popular.  Maybe you don’t spend that much time on the computer and internet or just plain have too many other things to do with your time (ie: you have a day job, or better yet, a life).  I admire you for that.  Those things do tend to take time and energy.

Technorati is a blog ranking and sharing site on the internet.  They just published some statistics in their report: 2010 State of the Blogosphere.  Seems like your average blogger is 25-49 years old, more male (60%) than female (40%), rather highly educated and a substantial number of them (>20%) do this for a living.   

But in any event, blogging is a writing forum that is actually being taken more seriously and is more widespread than ever as popular posts get discovered and shared on mainstream social media like Facebook and Twitter. You are only a Google click away from a blogger’s expertise on your search topic. Many bloggers are predicting blogging to overtake traditional print media in the not-so-distant future. 

Who Blogs and Why?
Bloggers are a diverse group. First there are a lot of folks who like to write and would love to simply catch up with friends and share their passions and interest.  This Hobbyist group is the biggest group blogging (64%), with personal satisfaction of writing as their primary goal.  

Another group is more professional in nature.  I think it is tied to the decline of traditional media.  There are a lot of intelligent journalists that are former employees of traditional media - commenting on art, music, the latest gadgets, travel, celebrities or business trends.  While trust in traditional media continues to decline, blogs seem to have a certain “genuine-ness” due to the community forum approach where comments are encouraged and welcome.  The author’s personality comes through, as they are often sharing of themselves rather than trying to report “just the facts”.  The new entrepreneur, consultant and small business owner are another big part of this group. 

A trend to watch;  Big companies are realizing that their brands can make significant guest appearances in consumer blog discussions, and are actively pursuing bloggers with large  audiences. The “mommy” blogger is a growing sector of bloggers that is attracting significant attention from consumer product companies.  A convention, named BlogHer, aimed at the growing female bloggers group was held at McCormick Place in Chicago last year.  In the size and scope of a major consumer products trade show, most of the the major packaged goods companies were in attendance.

As you can see from the chart, I am a new blogger, whose likely audience is fellow “marketeers” and business colleagues I have met along the way, and am learning as I go. 

Let me know your take on this world.  Is it new to you?  Do you read more blogs now than in the past?  Or maybe you have some words of advice for a new guy like me?   Somewhere among the millions of blogs out there, there could be one or two smart marketers like me  that would like to start some dialogue.

Locating in Philadelphia? – Watch out for the “Taxman”

The thoughts that dance through the mind of the soon-to-be entrepreneur are of innovation and the freedom to turn dreams into reality.   Anyone who has done more than dreaming will want to quickly decide where to build their dream.  In a search for cities and municipalities that might be conducive to this adventure, Philadelphia is a top choice – in some ways.

Global top 100 cities ranking for innovation in 2010 by the group  2thinknow ranks Philadelphia #6 in the USA and #30 in the world based on cultural assets, human infrastructure and networked markets. Not bad.  Philadelphia has a rich mix of history and culture, along with a go-get-em workforce attitude.

But, if you add taxes to the equation, the picture changes dramatically.  Taxes quickly become a central issue for a new business when calculating potential cash flow off of “slim” margins over the first few years.  The City of Philadelphia has a problem here.  Its tax rate is almost the highest in the nation for cities.  There may be brotherly love (and great cheesesteaks), but it comes at a whopper of a price:

Tax	Rate
PA State tax rate	9.99% on all net profits
Philadelphia Business Privilege Tax	1.415 mills on gross receipts 6.45% on taxable net income
Philadelphia Wage Tax (on gross wages)	3.9% (Resident) 3.5% (Non-Resident)

In 2001 Philadelphia was ranked as one of the worst cities in the country on a taxation comparison for business.  The Philadelphia suburbs have a more attractive taxation picture.  As a result, the city has seen residents and corporations leave the city altogether.  It is a spiral of sorts, forcing the need for higher taxes in the city to keep services whole.  Philadelphia has reduced its tax rates as more progressive politicians try to restore sanity to this spiral, but they are still burdensome. 

On a personal note, Philadelphia even taxes bloggers $300 if they make any revenue (you know, that $4.50 you made last year with the sidebar ads).

I love Philadelphia, and feel that the people, culture, and business community are great.  Yet, if you are starting up a business venture and are making profit maximization a priority, Philadelphia tax rates make the city a poor location choice at this time.

“Let me tell you how it will be - There’s one for you – nineteen for me” – John Lennon, Paul McCartney “Taxman”

The Power of Your Inner Circle

While I am no an expert on executive coaching, there is one thing that I have found true of successful people – the ones who consistently make things happen while others are merely getting by.

Bruce Springsteen and Jon Landau

Their secret is the power of their inner circle.  It’s surrounding yourself with like minds that are supportive of your goals and compliment your style. They fill in where you are not as strong to bring skills and strength to your vision.  Steve Jobs had Wozniak.  Bill Gates had Paul Allen and Steve Ballmer.  Paul had George, John and Ringo (as well as George Martin).  Springsteen had Jon Landau – a music writer who became his producer and went on to produce his biggest records.  Larry Page and Sergey Brin together launched Google.

Beatles and George Martin 1962

Andrew Carnegie once said that the reason he could make money in virtually any industry he would choose was that he had the best minds in the world in his inner circle managing his business. He attributed that alone to his commercial successes. It’s the inner core, the Power circle.  You might be a financial genius or marketing pro, but you will need the advice of product development, operations, and customer management.  You get the picture. 

Most folks of any level of success likely have an inner circle, but may not (formally or informally) consciously leverage the group as a team.  So how do you build and nurture your Power Circle.  First identify the importance of it.  Communicate you goals.   These are not just your golfing buddies, your friends from bridge club.  These folks are in for the ride and share your agenda.  They are confidants in the world of business and may be financially dependent upon your success – as you may be to theirs.   

Larry Page and Sergey Brin

Second, nurture the relationship.  Remember, it is a two way street.  They will want to help you but will likely want to understand what is in it for them if the requests are serious about managing your career and business.   And then be consistent, continuous and generous with your time for these folks.  You are building a fortress called the Inner circle.  It is the power behind your success (and perhaps theirs as well).

 

Garden of Dreams

NY Botanical Gardens - fall colors

Here is the simplest yet most powerful of analogies.  Success in business or a career is very much like success in gardening. 

I’ve observed that companies that dominate markets consistently provide surprising breakthroughs and advances in processes or new products.  And when they do, it is always attributed to the brilliance of some executive or the strength of a single breakthrough idea that is put upon a pedestal.  Yet, behind the scenes, there is an environment which nurtures business needs and resembles a greenhouse - a garden of projects and ideas – some close to being harvested, some just seedlings that may or may not amount to much.  Ideas are carefully cultivated by gardeners that have learned their craft over a lifetime.  These gardeners take joy in the gardening process – planning, planting, and then the many patient, nurturing steps necessary before the harvesting of the fruits.   A master gardener respects the patient process of planning, planting, feeding, watering, pruning, and harvesting of a garden.  The harvest is but a stage in the gardening or business process.

Less successful gardeners and business people employ a different process.   They don’t have many ideas planted.  They plant seeds in frenzy when times are tough and a quick harvest is needed.  They take care of only the seedlings they think will yield the biggest or quickest harvest.  They neglect gardening when times are good because there are too many other priorities.  They see gardening as an add-on to the more important day to day jobs of keeping the front end of the business running smoothly.  They prune plants and eliminate weeds only when the neglected plants are choking.  Their focus is outward and lay blame on environmental hindrances to growth.

Examples of the successful gardening approach:

1. An artist that explores multiple themes without regard to final outcomes until a project takes shape
2. The consumer products companies that consistently fills their funnel with exploratory concepts.  Then nurtures and prunes them in a clear process.
3. A department within an organization that focuses time to find more effective ways to streamline process, cut costs and build employee morale
4. The retailer trying out new ideas to revise in-store layouts or expand lines of goods carried
5. The R&D department that incorporate moonlighting projects into the performance objectives of researchers to keep people fresh
6. The executive with many personal and professional contacts cultivated to mentor and develop herself personally 

To be successful, you have to become a gardener.  You don’t have to call it that, but there is no other way to consistently be successful.  You have to embrace, empower the process.  You have to have many ideas at different stages of development. You cannot force projects to grow more quickly than they sometimes will or neglect those you don’t care about.  And when the garden is well tended and full of promising plants, the harvest can reward you abundantly.

The Art of the Personal Sale

We live in an interesting age in business.  The internet has helped us build our awareness with search engines, blogs,  discussion boards, and websites.  If you can just get something out there, someone, somewhere will see you.   It’s a great new world.  We embrace the internet as an awesome tool to help others become aware of you.  

But in business, you have to build relationships.  You can't do serious business without them. It’s hard to get to know someone online.  There will come a point when you eventually have to connect with somebody, look them in the eye…and close the sale….in person.

Man selling goods in an Istanbul market – photo by Bob Clark

In many places throughout the world, the tradition of face-to-face selling is a time-honored ritual.  If you someday get the chance to go to Istanbul, you should definitely go shopping in the marketplace.  You will notice something interesting.  People want to sell YOU something – the focus is on “You” not “something”.  In fact, if you want to buy something, i.e. a rug (very popular in Istanbul), the shop owner will want to sit down with you, pour you a nice cup of apple tea, and talk…for a while.  Really, there is no other way to buy a beautiful rug.  That shop owner needs to get to know you to understand what makes you tick.  You will discuss the goods, he will grow to know who you are, where you are from, your name, your kids and what you like.  You WILL buy something – you certainly don’t have to, but you will really want to.  It is a wonderful ritual in the art of selling. 

So as we navigate the Internet Age, don’t lose sight of the heart and art of the personal sale.

The Music Industry – Mixing Art and Value Creation

(Kind of a long post - skip if you want)

The music industry, as you know, has a big problem today. People don’t pay for its products.  OK, some do but a lot don’t.  File swapping, free downloading and CD counterfeiting (piracy) are widespread, virtually unstoppable and have now seriously reduced the profit margins and growth of the industry.  People still love music as much as ever and it permeates everything we do. 

I don’t work in or near the music industry but I am a huge fan of music (and part time musician).  So I don’t have its solutions, just making some observations.  It is going through the kind of tsunami scenario you don’t wish on anyone.  A lot of hardworking folks, musical, technical, marketing, sales and financial make a livelihood making and selling recorded music. 

“Market Attractiveness” is a model which analyzes whether an industry is worth competing in based on its ability to generate profit (Value Creation) to existing as well as new entrants.  It examines the drivers of growth, power of suppliers, substitutes, competitive ease of entry, etc to define the factors around value creation.   It’s the heavy lifting analysis of consultants etc.  For some real fun,  there is a really cool and comprehensive music industry business case study on Biz,net UK site:  http://www.bized.co.uk/current/research/2003_04/011203.htm

The music industry’s market attractiveness is poor.  This is interesting in that it has implications as a textbook case study in the need for business model transformation in the face of disruption.  I mean, how long would the business model of making another product (say, canned peas) stay constant if suddenly consumers could have them free.  Not long.  Gone in days.  There is no nostalgia to manufacturing and distributing canned peas if there is no profit in it and there shouldn’t be for music as a product either.   

“In summary, the music industry is an unattractive industry as the threat of entry is high, supplier power is low, intra-industry rivalry is high, threat of substitutes is high, and buyer power is high. With a high level of threat from four of the five environmental forces, the music industry is one to shy away from.”

Source:   http://schmidke330.wikidot.com/industry-attractiveness

Another great view of this kind of work based on Porters Competitive Forces Model can be found here:

http://answers.google.com/answers/threadview/id/325373.html

How will the industry improve attractiveness? 

Structure – Still set up like the days of old.  While it has consolidated to 4 or 5 companies that are huge stables of smaller labels and artists of all genres – the smaller artists probably don't make much money.  The artist virtually funds their own recording by using most if their record sales and publishing fees to pay back a loan or “advance” given to them to pay for large fixed costs of recording and selling required by the record company.  Artists assume a lot of the risk upfront which is why the industry is reluctant to change their model.  

Cost Structure -   The cost of recording has remained hugely expensive, even though I can buy the equipment needed to record an album pretty cheaply in my basement on a laptop.  The industry needs to get very lean  almost like a virtual mode – a skeleton staff that outsources temporary project teams.  Recording and mixing will also go much cheaper and you will only pay for producer talent at fixed rates. In fact, the distributors and bands could form smaller co-operative project teams. The problem here is in subsidizing the artists that are not profitable.  It likely has to end.     

Pricing – is it really worth paying $1.29 for a single song if the alternative is to get it free?   Supply and demand are now adjusting the real value of a song (my guess is closer to $0.25).   My math goes like this – 160 downloads done for free and 40 downloads at $1.29 – so about $0.25 on average.  Why not just charge everyone $0.25? Or go even further, by looking at the value advertising revenue stream of a much bigger audience when you give the downloads away free (sort of like how Linked in, Facebook, Google are free and make money).

Distribution – brick and mortar stores are gone. It is also hard to find more than 4 feet of shelf space at Target anymore.  Its all digital.  Apple company pretty much owns the pay-to-download market but others like CD Baby are now going up to expose you legitimately to smaller independent artists. Videos and DVDs are going there now. 

I don’t want to see the recorded music industry fail.  It’s personal for me since I love the music.  But when an industry is not growing or maintaining its value creation, it will go under quickly.   It all seems a bit stuck in those glory days.