Of Searches and Psychics: The Costs of Long Tail Businesses
When individual transactions are very small, non-monetary costs dominate
Chris Anderson of Long Tail fame recently posed a question in a post on the economics of abundance: what happens when it costs almost nothing to produce and stock one more item?
One surprising result is that non-monetary costs dominate the transaction. Most of you are familiar with monetary costs - pay $0.99 to download a song from iTunes (or $0.10 from AllofMp3). However, as the monetary costs fall, the most important impediments to a transaction are non-monetary: search costs and psychic costs.
Matchmaker, Matchmaker
Some of you may have studied the concept of "search cost" in college economics. It is the cost of finding the item you need - often measured in time and effort, rather than money. When sorting through the list of all music ever released, it would take you forever to find that piece of music you'd actually enjoy. Even at $1 a CD, you'd probably buy nothing, because you'd give up long before finding anything you'd like.
That's why Amazon provides a variety of tools to help reduce search costs: recommendations, samples, listmania, and many other tools. Though not perfect, Amazon now leads customers to buy items they've never heard of before. (I discovered Pepe and the Bottle Blondes on Amazon because I like Pink Martini).
It is not enough for a company to aggregate lots of small things. Reducing search costs by matching content to users is critical for Long Tail businesses.
Read My Mind, Please
Psychic costs are less well known and more difficult to measure. They are not the $3.99 a minute it costs to get your fortune read over the telephone - that cost is very monetary. No, psychic costs measure the stress of having to think about a transaction.
Your local phone company has known the concept for decades. Even though you'd save money paying by the minute for local service, you don't. Instead, you just pay the flat fee for unlimited local calling. People don't like to be metered. The psychic cost of stressing over your minutes outweighs the extra money paid for an unlimited package, so long as the total costs are fairly low. This is one of the reasons microtransactions for content have not really taken off.
Of course, unlimited usage leads to other problems. When AT&T launched its GSM cellular service by offering unlimited plans, some tricky customers reportedly used their phones as baby monitors!
The cost of overchoice, another psychic cost, is also receiving more attention. The best example comes from a recent experiment covered by both Malcolm Gladwell and Barry Schwarz in recent books:
Consumers were allowed to taste jam, then buy a jar. When consumers tasted 6 jams, about 30% bought a jar. When the selection was increased to 24 jams, however, only 3% bought one. The stress of trying to choose the best jam out of 24 rather than a pretty good jam out of 6 just led people to avoid buying altogether. The psychic cost now outweighed the benefit - and this was for a transaction costing $2 or $3.
The Tyranny Of The Non-Monetary
Netflix, Napster, and even HBO have made businesses out of bundling content for a single monthly fee. This reduces the incremental monetary cost of each transaction to zero. Given that psychic costs had an impact at $3, in a world of zero incremental cost, they can dominate the transaction.
Internet companies are driven by non-monetary costs as well, since they aggregate many small transactions that wouldn't otherwise happen. As a result, many companies have focused intensely on search. Search tools are improving significantly, matching content or products with people. As search costs continue to fall, expect an increased focus on psychic costs. Simplicity, limited choice, and hiding the masses of data will all become more common. Even sophisticated consumers prefer limited choice when the transactions are tiny.
Since writing on the Internet and the Death of 80/20, I've seen many new companies in the area. All of them aggregate many niche transactions. Only the best recognize the critical importance of reducing non-monetary costs enough that customers actually use the product.
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Kevin Laws has a beautiful post about the costs involved with long tail business that applies particularly well to many types of website whether you sell products, services, information or community.
He talks about the two costs of a t
Read More...I'm finding the whole theory to be quite fascinating, to tell you the truth, because I see implications for this arts center I'm trying to open right now... Read More
Le prix d'une transaction ne se résume pas toujours à celui indiqué sur l'étiquette, et cela est d'autant plus vrai que ce dernier est petit. Diminution de la valeur unitaire des transactions Deux facteurs expliquent une multiplication de petites Read More
Of Searches and Psychics: The Costs of Long Tail Businesses - via VentureBlog Psychic costs are less well known and more difficult to measure. They are not the $3.99 a minute it costs to get your fortune read over the telephone - that cost is very m... Read More
ソフトウェアサービスã§Long Tailã¯æˆç«‹ã™ã‚‹ã®ã‹ã€ã¨ã„ã†è°è«–ãŒäº¤ã‚ã•ã‚Œã¦ã„る。発端ã¯ã“ã“。åã ãŸã‚‹Blogã§å–り上ã’られã€ã‚³ãƒ¡ãƒ³ãƒˆã‚„トラックãƒãƒƒã‚¯ã‚‚大é‡ã«ã¤ã„ã¦ãªã‹ãªã‹ã«è‰¯ã„æ„Ÿã˜ã... Read More
VentureBlog: Of Searches and Psychics: The Costs of Long Tail Businesses is a facinating entry. I think it nicely captures one of the biggest challenges when trying to do the "long tail" thing... namely search. If Amazon only offered browsing... Read More
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This is a great post... never would have thought about psychic costs. Makes sense though.... Read More
Kevin Laws over at Venture Blog wrote a great piece on the non-monetary costs of long tail transactions and how search and psychic costs specifically dominate when the price point of a niche asset drops below certain thresholds. While Read More
"When individual transactions are very small, non-monetary costs dominate" (VentureBlog: Of Searches and Psychics: The Costs of Long Tail Businesses) Read More
Economist article Chris Anderson's original long tail article Chris Anderson's Etech powerpoint slides The official long tailweb site VentureBlog article Another VentureBlog article Idea Logical speech text Savage Beast CTO blog entry on long tail Read More
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Hi David, not sure if you've done it consciously or not- but you've stepped into a very fertile body of knowledge with your analysis of psychic costs.
Daniel Kahneman won the 2002 Nobel Prize for his work in area. There is a reason for why people upsize to the Large McValue meal, mortgage their houses to finance real long shots, or get caught up in hype against their learned judgment ;-)
http://nobelprize.org/economics/laureates/2002/kahneman-autobio.html