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Thursday, August 21, 2008

Should You Invest in the Long Tail?


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Anita Elberse.
Anita Elberse (aelberse@hbs.edu) is an associate professor of business administration in the marketing unit at Harvard Business School. Her article "How Markets Help Marketers" appeared in the September 2005 issue of HBR.

-- HARVARD BUSINESS REVIEW , July 2008 - August 2008

In a typical year, Grand Central Publishing (formerly Warner Books) goes to market with 275 to 300 book titles spread across two catalogs, its fall and winter lists. For each list the company identifies the handful of books it believes have the greatest sales potential and gives them the full benefit of its marketing capabilities. Of those, it spotlights just two "make" books, one fiction and one nonfiction, for which the company's publisher is willing, in her words, to "pull out all the stops." In the fall of 2007 those books were David Baldacci's Stone Cold and Stephen Colbert's I Am America (and So Can You!). The effects of this strategy show up in sales figures and profits. Whereas the 61 hardcover titles Grand Central put on its 2006 front list, on average, incurred costs of $650,000 and earned gross profits of just under $100,000, a wide range of numbers contributed to those averages. Grand Central's most heavily marketed title incurred costs of $7 million and achieved net sales of just under $12 million, for a gross profit of nearly $5 million, 50 times the average.

Grand Central is pursuing what is known as a blockbuster strategy, a time-honored approach, particularly in the media and entertainment sector. With limited space on store shelves and in traditional distribution channels, and with retailers and distributors seeking to maximize their returns, producers have tended to focus their marketing resources on a small number of likely best sellers. Although such an approach involves substantial risk, they expect that the occasional hit's huge pay-off will cover the losses of many misses, and that a few big sellers will bring in the lion's share of revenues and profits. In 2006 just 20% of Grand Central's titles accounted for roughly 80% of its sales and an even larger share of its profits.

Much has changed in commerce, however, in the decades since the blockbuster strategy first took hold. Today we live in a world of ubiquitous information and communication technology, where retailers have virtually infinite shelf space and consumers can search through innumerable options. When books, movies, and music are digitized and therefore cheap to replicate, the question arises: Is a blockbuster strategy still effective?

One school of thought says yes. Well represented by the economists Robert Frank and Philip Cook, in their 1995 book The Winner-Take-All Society, that school argues that broad, fast communication and easy replication create dynamics whereby popular products become disproportionately profitable for suppliers, and customers become even likelier to converge in their tastes and buying habits. The . . .

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