The effects of the abundance of
supply and choices in the new
internet marketing (:The Long Tail)
By Dr Costas Kyritsis
http://preveza.teiep.gr/kyritsis
Department of Finance
Technology and Education Institute of Epirus, Greece
SDU International week Odense April 2008
The supply distribution
The Pareto 80/20 rule
The “long tail” effect
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Traditional retail: The retailer makes the
majority of the money by selling more from a
minority of “hits”
New online retailers: The retailer makes more
money by selling less numbers per title from
a majority of “non-hits”
The major part of area under the
distribution curve…….
…shifts under the “tail” instead of
under the “head”.
2002:The decline of the “hitism”
The search key-words distribution in
Google is an empirical “Long tail” on the
total “area” of searches
Outline of the presentation
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What is the power distributions of the supply
What is the Pareto Rule
What is the long tail effect
Why it is emerging
What are its implications, for the modern world
What are the relevant new online marketing
techniques
What is its time dynamics
Examples
Trends in online commerce
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More sales, more algorithm-fuelled
recommendations.
Growth of sales by positive feedback loop.
Unlimited online selection is revealing new truths
about what consumers want and how they want to
get it in service after service.
More facts about online
commerce
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Many of our assumptions about popular taste are
actually artefacts of poor supply-and-demand
matching, a market response to inefficient
distribution.
This was the world of scarcity.
Now, with online distribution and retail, we are
entering a world of abundance. And the differences
are profound.
New facts about Books and
Videos
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The potential book market may be twice as big as it
appears to be, if only we can get over the economics
of scarcity.
Netflix has made a good business out of what’s
unprofitable fare in movie theatres and video rental
shops because it can aggregate dispersed
audiences.
Further facts about online
commerce
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In a Long Tail economy, it’s more expensive to evaluate than to release.
The slogan is: ”Just do it!”
All this good news for consumers doesn’t have to
hurt the industry.
When you lower prices, people tend to buy more.
So free has a cost: the psychological value of convenience. This is the
“not worth it” moment where the wallet opens. Its effect is mainly on the
“hits”
Emergence evolution:
Great Long Tail businesses can guide consumers further a field, by
following the contours of their likes and dislikes, easing their exploration
of the unknown.
The power law distributions
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1) Physics
2) The web
3) Macroeconomics
4) Ecology
5) Astrophysics
etc
When the size of the entities has a lower bound the
distribution is the Pareto distribution rather than a
power distribution
In macroeconomics
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The income of the population,
The size of the enterprises,
The consumption size of energy of the enterprises,
follow a Power distribution
Also : The size of villages, towns and cities follows a
Power distribution
The famous Pareto rules
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“More than 80 % of the population possesses less
than 20% of the total wealth”
“More than 80% of the total power in the planet is
consumed by less than 20% of the countries”
“More than 80% of the problems in a company are
created by less than 20% of the employees”
“More than 80% of the result is attained by less than
20% of a total effort, the next 20% of the result
requires more than 80% of a total effort”
How a Power Distribution is Derived from
Randomness and Growth
It can be proved in mathematics that that all the next
lead to a power distribution of the size of
exponentially growing entities:
 Same initial size, different growth rate or age
 Same initial size and age, different growth rate
 Uniformly randomly different division of initial size
(e,g. by a Poisson distribution) , same or different
growth rate or age
Linear scale graph
y = C x-a
Log-Log graph
log(y) = log(C) - a log(x)
The laws of the web: The size in pages and number of
links of the sites in the Web follows a power distribution
Source:
The Laws of the Web Bernardo A. Huberman
The MIT press 2001
Web logs distribution ranked by number
of inbound links is an empirical long tail
433 weblogs arranged in rank order by number of inbound links.
The data is drawn from N.Z Bear's 2002 work on the blogosphere ecosystem.
The current version of this project can now be found at
http://www.myelin.co.nz/ecosystem/
Mailing lists is an empirical
power distribution
Figure #2: All mailing lists in the Yahoo Groups Television category, ranked by number
of subscribers (Data from September 2002.)
The Technorati Popularity chart is an
empirical “long tail”
A formula for modeling Long
tails
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Where
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x
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F(x) = the share of total volume covered by objects up to rank
N50 = the number of objects that cover half of the whole volume
α = the factor that defines the form of the function
β = total volume
Application of the model
Box office sales in the U.S
The 2004 book sales power
distribution
Table 1: Book sales in the U.S. in 2004
x = rank
Cumulative volume
(copies/year)
Cumulative share
(based on real data)
Cumulative share
[based on the model: F(x)]
10
17396510
2.6%
2.7%
32
31194809
4.7%
4.6%
96
53447300
8.0%
7.8%
420
100379331
15.1%
15.1%
1187
152238166
22.9%
23.4%
24234
432238757
65.0%
65.1%
91242
581332371
87.4%
87.0%
294180
650880870
97.8%
103.7%
1242185
665227287
100.0%
118.7%
The 21st century and the power
distribution
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The older smooth shape of
the power distribution
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The anticipated 21st century
new shape of the power
distribution
The new online retailers and physical
retailers as they take deferent parts of
the supply
Online music popularity (Rhapsody
2005):The threshold of availability of
traditional retailers and online retailers
The abundance of choices in the online
retailers compared to the offline retailers
The abundance of new
documentaries is only online
Software supply
Hollywood movies: The
truncation of the distribution
The truncation of the supply
distribution seen in Log-Log
Democratization of the
production 1
Democratization of the
production 2
Connecting supply and
demand
Producers, aggregators,and
filters
The “Long tail” rules
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Make everything available, no rejections
Help people find it, with filters
Lower the costs
Let customers do most of the work
One distribution and filter method cannot fit it all
One price does not fit all
One category does not fit all
Share information
Understand the power of freebies
The participation of
consumers in the production
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The “Long tail” is fed often by the consumers
themselves, for that sake of getting public or for the
love of doing it, rather than for money gain.
This amplifies the collective intelligence in
unprecedented degree.
At the same time the collective opinion is correcting
mistakes and increases the quality of the massively
created products.
An example is wikipedia, and the Linux operating
system.
Top-down and bottom-up
messaging:Pre-filters and post-filters
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Traditional retail tries to “predict” demand as there is
limited shelves space and high supply chain costs.
These are the pre-filters as top-down messaging
(experts minority wisdom)
The new online retail market makes everything
available and tries to measure the online demand
and amplify it. These are the post-filters as bottomup messaging (Collective intelligence wisdom)
Does the abundance of choices (tail)
reduces the sales of the hits (head)?
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The sales of the existing hits do not decrease
Nevertheless the industry is reducing the quantity of production
and marketing of hits
This has its good effect that the market is not so strongly
manipulated by a small number of producers and advertisers
(democratization)
Huge advertising budgets of the hits are not necessary
anymore, when online aggregators make more money from the
non-hits.
Dangers of the “hitism”
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Everyone wants to be a star
If it is not a hit, it is a miss
The only success is the mass success
Low-selling=low quality
If it were good it would be massively popular
“Self-publish”=bad
“Direct to Video”=bad
“Independent”=The could not get a deal
Does the abundance of the choices
increases the demand or simply shifts it?
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The statistics show that consumers examine a larger number of
products. This is made possible by powerful and smart online
search filters.
The demand is increasing in number of titles and items,
although an individual consumer may or may not spend more
money in total.
The intellectualization of the population brought by the internet,
shifts household expenses from basic products like food, and
cloths to cultural like software, CD, MP3’s, DVD’s etc.
The net results is a mutual benefit of suppliers and consumers
as far as e-products are concerned
Should prices rise or fall in the zone of
abundance of choices (long tail)?
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The prices as well as the quality vary more in the tail than in the
head.
The average price is rather lower in the tail than in the head.
But the affiliation commissions of the middle agent are higher
in the tail than in the head.
There is no real “Should”. The market’s balance and producers
quality and expectations defines the prices in individual products
The power of collective
intelligence
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For the first time in history it is possible to measure the
consumption patterns, inclinations,and tastes of the entire
market of consumers in real timer while shopping.
And just as quickly adjust the market to reflect them.
We are leaving the information age and entering the contextual
suggestion age
Examples: Yahoo’s music ratings, Google’s Pagerank, MySpace
Friends, Netflix users reviews, Amazon’s statistically based
suggestions.
Collective wisdom is a finer resolution compared to traditional
professional individual critics
Unlimited choices:A non-zero
sum game
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In the fast changes of the distribution mechanisms of
supply and demand it may happen that some parts
may start loosing.
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This does not mean, in the macroscopic overall
picture, that someone else is gaining their loss.
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In the overall picture the win-win phenomenon is the
dominating and that which is driving the evolutional
changes
The variance of the quality
increases in the long tail
The demand for more powerful search filters is
higher in the long tail, because of larger
variance of the quality
The time dynamics of the supply
distribution:As time goes one the
distribution flattens
Review and Conclusions
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What is the power distributions of the supply
What is the Pareto Rule
What is the long tail effect
Why it is emerging
What are its implications, for the modern world
What are the relevant new online marketing
techniques
What is its time dynamics
Examples
Sources 1
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BestBuy.com
Launchcast.com
Salesforce.com
Netflix.com
Rhapsody.com
soundscan.com
dvdscan.com
CRC standard probability and statistics tables and Formulae by daniel Zillinger-Stepen
Kokosa Chapman&hall/CRC 2000
Sources 2
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The Bass diffusion model (wikipedia)
A practical model for analyzing long tails by Kalevi Kilkki
http://firstmonday.org/issues/issue12_5/kilkki/index.html#author#author
Repeating history, The Long Tail, and software demand by Dion Hinchcliffe @ 6:48 pm
June 1st, 2006 http://blogs.zdnet.com/Hinchcliffe/?p=45
The sources of innovation by Eric Von Hippel
http://web.mit.edu/evhippel/www/sources.htm
Democratizing innovation by Eric Von Hippel http://web.mit.edu/evhippel/www
Power Laws, Weblogs, and Inequality by Clay shirky http://www.shirky.com/
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The Laws of the Web Bernardo A. Huberman The MIT press 2001
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