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Tuesday, March 22, 2005

Long Tail Or BOP : Nicheification Or Commoditization

Chris Anderson writes on the topic Long Tail Vs. Bottom Of The Pyramid and comes with some insightful observations:
- The BOP like the Long Tail, is about finding ways to efficiently address sub-economic markets. BOP is talking about how to sell goods and services to the world's 4 billion poor, for mutual benefit. Chris earlier wrote aboutThe Biggest Market Is In The Smallest Sales. The natural thing is to relate the bottom of the pyramid & the Long Tail.

- The similarities are notable. Both theories are based on the notion that if you break the economic and physical bottlenecks of distribution you can reach a huge, previously neglected market. They both recognize that millions of small sales can, in aggregate, add up to big profits. And they're both focused on ways to lower the cost of providing goods and services so that you can offer them at lower price point while still maintaining margins.
- There is a key difference between them that makes them fundamentally incompatible. The Bottom of the Pyramid (BOP) argument is essentially based on commodification. Take existing goods and services and make them an order of magnitude or two cheaper, either to buy or to make but ideally both. Typically, this means reducing goods to their bare essentials and delivering them on a massive scale.This requires:
- 1) low price points;
- 2) minimal marginal costs (reduce consumables and packaging to the bare minimum);
- 3) "de-skilling" services so non-experts can deliver them;
- 4) the use of local entrepreneurs
The canonical example is the 1 cent single-serve shampoo.The BOP model is focused on taking a single product or service and finding ways to make it cheap enough to offer to a larger, poorer, market. Chris think - so this is essentially about commodification.

- The Long Tail, on the other hand, is about nicheification. Rather than finding ways to create an even lower lowest common denominator, the Long Tail is about finding economically efficient ways to capitalize on the infinite diversity of taste and demand that has heretofore been overshadowed by mass markets. Affluent and rich (those comparable to those in the head) find themselves in the tail.Indeed, they are often drawn down the tail by their refined taste, in pursuit of qualities that are not afforded by one-size-fits-all. And they are often willing to pay a premium for those goods and services that suit them better. The Long Tail is, indeed, the very opposite of commodification.
- The Long Tail is made up of millions of niches. The Bottom of the Pyramid is made up of mass markets made even more mass. Both lower costs to reach more people, but they do so in different ways for different reasons. Chris concludes, They're complimentary forces, but fundamentally different in their approach.
My Take:Both ideas are about expanding the market. It's just that they represent different but complementary approaches. The idea is to create a different financial structure enabling a wider choice of portfolio at lower price points. Some questions remain though:
- Can a same organisation or business model benefit from both the long tail and the bottom of the pyramid?.
- Can commoditization or Nicheification provide entry barrier to competition and if so how easy is it to get past them?.
- Would these models inherently suit one industry segement over other - say would The Long Tail be more adaptable to say services and commodification to manufactured goods etc , or suit different geographies differentl say nicheification in the US and commoditisation in the Africa's?.
- What impact these approached would have on say the new economy industries over the traditional industries.
- The economic benefits - while BOP has already demonstrated some attractive economic returns - we need to analyse the economic returns from the Long tail as seen from different players - volume or variety need not always contribute positively to profits - the data needs to be studied in more detail

Category: Longtail
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