Profiting from the Long Tail

As digital content is increasingly delivered electronically and “all-you-can-eat” pricing plans are more and more common, marketing managers are finding themselves in a struggle to decrease, rather than increase, consumption. Netflix, Blockbuster, and now Amazon.com are in the subscription business, delivering digital content by mail and broadband with no late fees and various unlimited-pricing models. There is no such thing as a free lunch, however, so all unlimited plans must, in fact, be limited in some way to keep costs in check. Accordingly, Netflix restricts the number of DVDs subscribers can order at one time, and Amazon caps the number of rentals per month. Digital content providers can reduce costs in a variety of ways, all of which relate to recommendation engines and the concept of “long-tailed distributions.” These distributions, in which a few products are in very high demand while most are in very low demand, describe endless-inventory e-businesses like Amazon and Netflix. (Chris Anderson’s book on the topic, The Long Tail, is due out from Hyperion this summer.) Following are three such cost-control strategies. Promote the back catalog. First, companies can encourage the consumption of lower-cost units. New-release DVDs, for example, are more costly than items from the back catalog because of higher up-front fees and revenue-share arrangements with film studios. Ranking films by demand forms a long-tailed distribution in which expensive new releases make up the front end and the cheaper back-catalog items constitute the tail. However, as companies like Amazon have discovered, the total sales volume of the worst sellers can exceed those of the best sellers. By using recommendation engines to encourage customers to rent inexpensive back-catalog DVDs chosen to please individual tastes, providers can increase profits and maintain customer satisfaction. Through recommendations and other promotions, Netflix ensures that just 30% of rentals are new releases, compared with 75% at Blockbuster outlets. Our analysis of one online recommendation engine found that 90% to 95% of titles suggested were from the back catalog, even when we indicated a strict preference for new releases. Slow consumption. Second, companies can recommend items that take longer to consume. Someone spending several nights watching a DVD containing an entire season of the TV show The Office is not renting and returning many features in succession, which saves the provider acquisition and postage costs. Our analysis of recommendations found that, intentionally or not, recommended DVDs were significantly longer than top new releases, and many contained discrete episodes, which encourages viewing across many nights. Encourage procrastination. Third, companies can reduce costs by encouraging customers to put off using their products. Research from economics and psychology into how people make choices speaks of two selves, one who predicts “wants” in the future, and one who evaluates them in the present. As anyone who has neglected a gym membership knows, the future-looking self can make virtuous choices that the present self wants little to do with. Recommendation engines can remind customers of products they’ve always wanted but have never gotten around to using. Movie classics offer a good example. When the DVDs arrive in the mail, customers’ present selves are likely to prefer light fare like Meet the Fockers over a demanding classic like The Seventh Seal, especially after a long day at the office. When, as a result, they postpone returning, say, just one of three DVDs, this creates a bottleneck that reduces the costs of fulfilling a subscription. Customers’ virtuous choices then become management’s reward. As more companies offer unlimited subscription models for licensed content, we can expect to see recommendation engines and long-tailed distributions paired in these and other creative ways. Netflix has recently ruffled some feathers for what may be an illegal selective delay in sending titles to heavy users. Fortunately, lowering expenses does not have to come at the cost of angering loyal customers or pushing the limits of fair business practice. When applied artfully, a tool such as a recommendation engine can increase profitability and customer satisfaction simultaneously. As many happy Netflix fans can attest, customers are well served by exposure to the quality content found in the back catalog, but only as long as they actually get around to watching that Ingmar Bergman disc.

Profiting from the Long Tail

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