Amazon Doesn’t Do Long-tail. Why Should You?

The idea of “endless aisle” and “long-tail” retail has gained much traction since the publication in 2005 of The Long Tail: Why the Future of Business is Selling Less of More, by Chris Anderson, the then editor of Wired magazine. Anderson cites Amazon as a trailblazing company that has taken advantage of a long-tail strategy.

Competitors, meanwhile, have noticed Amazon’s apparent success in generating profit from its endless aisles of products and this has spurred many of them to adopt similar long-tail strategies.

Despite long-tail’s popularity, however, there isn’t a lot of empirical research on its benefits for online retail companies. Instead, what research there is suggests mixed or mediocre results, with the importance of long-tail often depending on the particular metrics used by researchers.

The best evidence for questioning the wisdom of long-tail as a go-to strategy for online retailers, however, is the long-tail poster-child itself: Amazon. This is because Amazon doesn’t do long-tail — despite conventional wisdom.

Instead, what Amazon offers is a marketplace for long-tail items.

In other words, Amazon only focuses on directly selling and fulfilling high-demand products and leaves long-tail merchandise for its independent sellers to fulfill. In its electronic category, for example, Amazon only sells 7 percent of the products while the remaining 93 percent are sold by third-party merchants, according to a 2011 article in Marketing Science.

Amazon is a massive company with access to large amounts of aggregated retail data and advanced machine learning algorithms. If Amazon, with all of the big data resources at its disposal, has decided against selling long-tail products directly, other retailers might want to rethink their own endless aisle strategy.

Amazon’s Approach to Long-tail

Here is the logic behind Amazon’s approach to long-tail.

Long-tail has clear benefits.

• The variety inherent in an endless aisle strategy attracts customers, encourages them to buy many different products in one place, and keeps them loyal.

• It also offers great market research. Out of an endless aisle of products, some will begin to sell well, providing solid data for direct offerings that will likely be popular.

• Long-tail products have much lower traffic acquisition costs from search engines, price comparison engines, and online auctions.

Long-tail has per-partner costs.

• Despite marginal costs being lower in the distribution tail, they are still present and include all the costs of supplier on-boarding and data exchange, as well as cataloguing, digital conversion, encryption, storage, and building of databases.

Amazon’s merchandising organization does not and cannot know niche markets.

• The reality of trying to understand every permutation of market demand and then sourcing the aligned supply is not scalable.

Niche sellers often have better market information and lower operating costs than larger retailers.

• Niche sellers might be working out of a basement or garage. They know their niche markets better, and they have better access to and relationships with niche suppliers.

• They are, therefore, in a better position to incur the risks and costs of long-tail.

Allow third-party sellers to offer their products on Amazon’s marketplace.

• Amazon receives a cut of each sale.

• Amazon takes advantage of all the benefits of long-tail and endless aisle.

• Amazon passes the costs and risks associated with a long-tail and endless aisle strategy onto its third-party sellers.

• Amazon uses third-party long-tail data to cherry pick — i.e., curate — and directly offer products that have begun to sell well in Amazon’s endless aisle marketplace. Essentially, Amazon crowd sources its market research using third-party long-tail merchants.

Beware of the Long-tail?

The above outline of Amazon’s long-tail strategy suggests that individual online retailers should be cautious when attempting to offer an endless aisle of long-tail products, especially where it incurs the costs of partnering with a significant number of suppliers.

Such a strategy will likely only be successful with a marketplace business model — the utilization of a large and vibrant online retail community with thousands of independent third-party merchants taking on the costs and risks of long-tail.

Long-tail, however, will not work for non-marketplace retailers. Instead, those retailers should focus on improving their curation science through market data and an understanding of their customer base.

As they define their curation of suppliers and inventory, retailers can then expand deeper into the inventory of their supply partners via drop shipping. The key to this is setting a clear threshold for where the aisle ends based on partnership, content overhead, and alignment with the curation brand authority they intend to create.

This “less-limited aisle” strategy corresponds with the conclusions of researchers in an International Journal of Arts Management article titled “The Long Tail: Myth or Reality?”

Since the Internet is marked by excess supply, the main issue facing cultural industries now appears to be not how to ensure diversity but how to organize distribution (information on available content, referencing and ‘editorialization’).

Amazon’s direct offerings avoid long-tail and follow this editorialized (i.e. curated) “less-limited aisle” model.

Online retailers would be wise to follow its example.

Originally published in Practical Ecommerce: http://www.practicalecommerce.com/Amazon-Does-Not-Do-Long-tail-Why-Should-You