They taught us in business school to be attentive to the Pareto principle; also known as the 80/20 rule. Pareto states that 80% of outcomes are a result of 20% of causes, or more commonly in business, that 20% of customers drive 80% of volume. Larger competitors are governed by Pareto, and spend significant time, money and resources to capture market generated by the vital few.
The 80/20 rules assumes that a provider can leverage a higher return on investment by addressing behemoth customers who require fewer interactions at high volume. Such efficiency is intuitively satisfying to our management sensibilities.
One counter that can be employed by smaller competitors is to seize an underserved market often described as “the long tail”.[i] The Long Tail flips Pareto on its head, and suggests that money can be made from addressing the remaining market, made up by those who buy infrequently and in smaller increments. To serve such a market requires the provider to offer a wide offering.
The Long Tail concept has been an enabler to the e-commerce revolution. Amazon (for example) has proven that a provider can reach the mass-market one customer and one product at a time, which is quite different than the customer buying multiple products from a retailer in a single trip.
In B2B (business-to-business), the long tail may provide some respite from vicious competition. However, to compete in this space requires a mindset of low cost, operational efficiency and virtually no inventory. Numerous e-commerce sites utilize “pack-n-ship” methodologies, outsourcing the bulk of the manufacturing, distribution and transactions to others. To provide the wide breadth of offering through pack-n-ship requires an integrated logistics system.
As with many other things, technology is the great equalizer and can provide a solution for what would otherwise yield higher acquisition and distribution costs. Much of the premise of retail is the last mile of distribution, which dictates that the last mile is the most expensive (which is why products like food don’t fare well in e-commerce, as getting the product to the consumer is too costly). Certain products that are not too costly to ship fit within this strategy seamlessly.
To pursue the long tail requires a penchant for serving niches, and the unmet needs of buyers with unique tastes or buying patterns. The larger competitors will often ignore these markets as too costly or difficult.
So if you’re looking for a novel strategy with less competition, consider the long tail.
[i] The Long Tail: Why the Future of Business is Selling Less of More by Chris Anderson