Tuesday, February 12, 2013

Pricing Opportunities in The Long Tail

In 1906, the Italian Economist, Vilfredo Pareto discovered that 80% of the land in Italy belonged to 20% of the population, a finding that has been popularised into the 80:20 (or Pareto) rule. The converse (20% of the land being owned by 80% of the population) was never as popular as the 80:20 rule, until Chris Anderson published his book, “The Long Tail”, in 2006.

Andersons’ book was primarily written from a digital product perspective. There are blockbusters movies at the “pointy end” of the long tail (e.g. Titanic), but at the other end of the curve are the most obscure and unknown movies that few, if any, have ever heard of, never mind watched.

Many Leading Company’s have a long tail of products they sell in relatively small volumes, yet Anderson’s book was inconclusive when it came to pricing strategies for products in the long tail. Should those obscure products be priced high to reflect their scarcity, or low to reflect their demand?

Long tail products are those that are purchased infrequently and in small volumes. This implies that customers probably have pricing amnesia: they probably can’t remember what price they paid for the product the last time they purchased it, if they have in fact purchased the product at all in the past.

With that in mind, here are some pricing strategies that I have recommended to clients with long tail products, in both B2B and B2C markets, many of which are inter-related.

Firstly, consider imposing or increasing minimum order quantities (MOQs). This helps to make it profitable to make a batch of your product or service. Better still, get the customer to buy in bulk (catering for their future needs) and to store or warehouse it themselves.

Given the infrequent purchase of long tail products, customers will occasionally ring up wanting a long tail product in the next 24 hours or so. Urgency is something that can be surcharged, so monetise any urgent deliveries and production runs.

A third opportunity is to remove technical support for the product. This should have already been provided (perhaps when the product was at the blockbuster end of the long tail), or deliver technical support online. This helps reduce the cost-to-serve the customer, which in effect is a stealth price increase.

Exclude long tail products from contract negotiations. Focus these discussions on the key products and services the customer is buying from you, rather than peripheral products.

Finally, monitor customer needs and the product life cycle, particularly in the case of spare parts, which commonly exhibit long tail product characteristics. At some point in time, some products become collectors items (take cars for example), and the fanatical owners of these products are less price sensitive and have a higher willingness to pay than when the product was in earlier stages of its product life cycle.

It is very easy to neglect the pricing of products in the long tail, but as the old adage goes, “look after the pennies and the pounds take care of themselves”. I know of one company that hadn’t reviewed prices in seventeen years (yes, you read right!). There are pricing opportunities in the long tail.

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