Stop pitching long tail business models
The long tail concept as it was introduced by Jeff BEZOS a few years ago with Amazon (and further explained by Chris ANDERSON), has destroyed what was the common sense approach of running a commerce. Before Amazon was a success, the common sense dictated that the Pareto rule was enforced: 20% of the products will command 80% of the sales. In some markets, like movies, music, video-games… it was even more extreme with only a few block-busters returning money each year.
The long tail model changed all this, demonstrating in these very markets that the total of the micro-revenues generated by an abundance of products, could be much more profitable than only supporting the block-busters. The very logic of the long tail is a statistical model requiring that you add up as many unfrequent, exotic, rare, niche products as you can… away from the core best-sellers.
It seems obvious that if you can pull it off, millions of sales on unique items trump thousand of sales on a dozen of best-sellers. And to quote Amazon on that:
We sold more books today that didn’t sell at all yesterday than we sold today of all the books that did sell yesterday.
Yeah, you may want to read that twice.
Then again, it’s not so simple. If only for the huge investment you will be facing to build your long-tail offer.
For some reason, all this is still obscure for many entrepreneurs. Consequently, for many years I’v been seeing tons of startups invoking the long tail as a business model. Most of the time (read: 99.8% of the time) they just embarrass themselves by their lack of business understanding.
Personally, I usually meet 3 specimens of this-is-absolutly-a-long-tail-business-model-that-you-are-speaking-of startups’ pitch:
- The bucket optimization
- The niche conundrum
- The micro-revenues false start
Let me detail them, so as to be sure that I don’t meet you trying to wing one of them:
The bucket optimization
Also known as the kitchen sink approach, it relies on invoking the long tail mantra as soon as the startup offer isn’t fiercely focused on something unique. For many VCs in Europe, a “long tail startup” pitch has become a poor excuse for a “we throw a bucket of things on the wall, and try to see if one of them sticks”. Now, the real pitch will use better buzz words, such as:
To develop a first-mover advantage, we have selected a long tail approach to our core market. As a first step we will produce specific value offers for multiple market segments, and then we will pivot and engage our resources on the one demonstrating the best stickiness. Right away, this will ensure that we don’t miss the best ramp up opportunity.
This is just a bunch of lazy wishful thinking. In French we would say “Et la marmotte elle met le chocolat dans le papier d’alu”… but this doesn’t translate.
A VC will read through your pitch this way:
Hey, we clearly don’t have a clue on what to do on this market, although we are all in love with our initial startup idea. So, the plan is that we’re going to burn as much money as possible to explore a dozen of iterations of this idea at the same time, and hopefully get one of that will interest someone. From there we will see if we can get even more money to maybe understand the underlying problem that we could solve.
How sexy is that? Well, it’s not. At all.
A long tail strategy is not a poor excuse for your market ignorance, and your further badly designed pivots. Because you should perfectly know the market problem (or see a new one coming fast enough), you could decide to offer a plethora of products AND even increase this portfolio as quickly as possible. This would be a typical strategy to innovate old, quiescent business models such as the printed press, executive education, car manufacturing, etc.
The niche conundrum
Another approach of a long tail business model pitch, would be to try to explain that you go for a niche market, so as to insert your business model in a long tail perspective. The pitch would be something along these lines:
Our strategy is to step in the market by seizing up the opportunities in a first specific niche. We really aim at excelling in this niche, and build as fast as possible a first audience with a powerful brand value. From there, we will reinvest in a several more adjacent niches and eventually build a powerful long tail model.
Ah, this sounds cautious and smart isn’t it? But then again, it’s not.
Don’t get me wrong: this may work. Actually the problem is the definition of the term “niche”. There is the kind of niche market where you can develop several businesses and not really see the end of it. It’s a niche in the sense of “a very specialized market segment that is only in its early phase of development”. The low-cost airlines market was a niche in 1971 when Southwest Airlines started its business, and the low-cost business model really started with Ryanair leveraging EU deregulations in 1992.
But there is also the kind of niche market that will not expand further, and stay under the radar forever. People waiting to take a flight around the world on new year’s eve, is such a niche market. You can probably build a business around that somehow, we just know you’re not the next Google.
In both cases, this is not a long tail business model. If you believe your “niche” will expand fast enough to a full-sized market, then your strategy is product leadership. If your niche will stay a micro-market, then you’d need dozens of them upfront to be in a long tail approach.
Here again, a VC will read through your pitch like that:
Well, we don’t have enough serious money to start a business. So, we’ll try to do a demo of something for such a small market, that no-one will want to compete with us. Hopefully they will buy it, on the premise that no-one talks to them anyway. Then if we survive that useless venture, we believe that you will take us seriously and give us enough money to start to go on real markets.
Doesn’t feel that impressive now?
The micro-revenues false start
The last typical pitch blunder that I see very often is again with startupers that aim at explaining a strategy far away of their business literacy comfort zone. Let me try to summarize this kind of pitch:
We are innovating the current market by foregoing old-school competitors with a light, variable cost-structure. By doing so we will basically offer for free what incumbents currently struggle to sell, and we will create a long tail of adjacent micro-revenues to change the monetization paradigm.
Probably the most impressive of the three pitches right? In plain english you create a free business model to siphon the customers out of your competitors reach. It means creating a free online newspaper, when the Wall Street Journal struggles at building an online paywall. Of course, you disregard that you are probably not as good as the WSJ yet, in term of sourcing breaking news, but you have to start somewhere right?
What you try to pitch is what Zynga did when they started in 2007, with Kleenex-like video games that you would buy online for a few cents, play a few hours max, and discard. Rinse and repeat enough time and you can generate more than 300 million USD per quarter, while the typical video games studios struggle at producing a block-buster every few years. Of course it also meant that Zynga operated in a wildly different way creating a lot of games each year, each one of them in a matter of weeks with half a dozen people team per game.
Except that most of the time your strategy is not so ambitious and innovative. A VC will probably translate your pitch like that:
For some improbable reason, we reaaaaally want to enter a typical old-school market, although we know for sure that there’s no more money in it. But since we are a startup we can burn inane amount of cash mimicking what the big players are doing right now, and giving it away for free to create buzz around us. At some point we’ll try to charge something by monetizing peripherals offers or extra services here and there. Knowing that customers won’t be excited by that our magic recipe is to just charge a few cents each time, secretly hoping that they won’t feel it. Hey, if banks can pull it off, we sure can.
I probably don’t have to elaborate why you are not building a long-tail with that. You just suck at building a powerful added value for your market and at marketing it.
A long-tail business that will shame you
To conclude this long rant, I usually love to take examples of what we are talking about outside of the technological realm of “smart” people.
My bet is that if someone managing a small pizza store, or a sushi restaurant is better at business strategy than you, without a MBA or six mentors trying to push him in the right direction, that should be a wake-up call. These guys may not have a strong business literacy, but their business acumen is world-class.
Today’s example, relating to the long-tail would be Galco’s Soda Pop Store in Los Angeles:
Here, you have it all:
- A borderline crazy selection of goods;
- Each one of them addressing exotic tastes (cucumber soda anyone?);
- A clear-cut business focus (old-school, disappearing brand of non-diet / no-energy colas);
- The persistent will of increasing the selection without boundaries;
- Strategies to increase recurrent purchases (in-store recommendations, glass bottles reusability when regulations will permit);
- And of course staying away from the 2 big brand names that will diminish the added value of it all.
For me, this guy is a magician.
I don’t argue: what is doing is more pure love for a product than a surgically design business strategy. But that’s for sure where the best businesses are coming from. This kind of entrepreneur will spent ungodly amount of time researching their market, connecting with their customers, fine-tuning their added-value (I bet that any typical shop-owner in the US would see deposits at the bottom of the bottle as a problem, not the testimony of genuine aromas), and generally pushing the envelope.
So obviously, you can mock his embarrassing website, given 2013 standards (although it’s late-nineties six-colors, flat-design is all the hype again).
But you know what? When you launch your next web 2.0 long tail startup, instead of trying to outsmart yourself on powerpoint… just try to beat that. Because, as far as I’m concerned, this guy puts the bar pretty high.