Pareto Principle No More

 

This week we looked at the concept of the “Long Tail’ – this is the idea that we as a society are changing from a focus on a smaller number of ‘hits’ (the mainstream range of products) towards a focus on the incredibly large amount of niche products (Anderson 2004).

In the past, the marketplace was seen as being dominated by a small number of top-selling products. It is in the best interest of bookstores, for example, to only sell popular books that have a high number of sales.  This is known as the Pareto Principle (or the 80/20 rule), which states that 80% of a business’ sales come from 20% of their products.  Anderson (2004) notes that the reason that this principle suited businesses before the Internet and online sales were possible was the ‘tyranny of space’ – a bookstore only has so much floor space and the radio has a restricted amount of stations, for example.

However, with the rise of Web 2.0 there has been a trend away from the Pareto Principle towards a new theory which values the wealth that can be achieved through the large amount of niche products that exist – the Long Tail theory.  In the realm of books, for example, an online stockist like Amazon can stock a incredible number of books that cannot be found in bookstores – whilst each book individually may not receive a large number of sales, the combined value of the sales of all of these niche products produces a large return for the company.

Basically – making fewer sales on a wide variety of products can produce a quantity of sales that compete with making more sales on a narrower range of (mainstream) products.

I think the Long Tail is an exciting concept because it finally acknowledges that we as consumers have interests that are much broader than the mainstream; there are many niche interests that may not have a large audience, but there IS an audience nonetheless. So how does this impact the entertainment industry? Businesses need to respond to these changes by stocking a wide variety of products, as a reflection of the incredibly diverse taste of consumers. Anderson (2004) also acknowledges that is important for retailers to stock  mainstream products as well as ‘Long Tail’ products – consumers need a ‘familiar point of entry’ from which to begin their search.

I think the most interesting question to arise from this dramatic shift is how retailers with no online presence will be able to compete with online stores.  Physical stores have space restrictions that make it impossible to compete with the large warehouses of online retailers such as Amazon, and therefore they are unable to reap the benefits of the Long Tail.

Thanks for reading!

 

Katie

 

Image sourced from here.

References:

Anderson, C 2004, ‘Long Tail 101’, The Long Tail, 8 September, accessed 8/9/2012 via http://www.longtail.com/the_long_tail/faq/

Anderson, C 2004, ‘The Long Tail’, Wired Magazine, issue 12.10, accessed 8/9/2012 via http://www.wired.com/wired/archive/12.10/tail.html

One thought on “Pareto Principle No More

  1. On a separate note, I just wrote this all out and it deleted itself so now I need to start again. /RAGEFACE haha!

    Nothing annoys me more than when I go into my local bookstore looking for a book that didn’t quite make the best sellers list and instead of having any stock of that, they have 1000 copies of ‘Twilight’ or ‘Fifty Shades of Grey’. So I go online. And this is why Amazon has become so damn popular. Because we as consumers can access more products online that break away from the mainstream items.
    Amazon goes up in popularity and bookstores close up shop. This is why the Pareto Principle just doesn’t work in our society. We don’t want to be boxed up in one niche market we want variety so we turn to online shopping where we can get what we want.

Leave a Reply

Your email address will not be published. Required fields are marked *