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Long Tail Referrals

(October 12, 2005) Last week, we started a tutorial on Web2.0 with a short discussion at the top level. While not everyone agrees that there even is such a thing, we're positive that there's a sea change. It's long past begun. Jason Goldberg at jobster offers an interesting summary.

The Long Tail, a term coined a year ago in Wired:

To get a sense of our true taste, unfiltered by the economics of scarcity, look at Rhapsody, a subscription-based streaming music service (owned by RealNetworks) that currently offers more than 735,000 tracks.

Chart Rhapsody's monthly statistics and you get a "power law" demand curve that looks much like any record store's, with huge appeal for the top tracks, tailing off quickly for less popular ones. But a really interesting thing happens once you dig below the top 40,000 tracks, which is about the amount of the fluid inventory (the albums carried that will eventually be sold) of the average real-world record store. Here, the Wal-Marts of the world go to zero - either they don't carry any more CDs, or the few potential local takers for such fringy fare never find it or never even enter the store.

The Rhapsody demand, however, keeps going. Not only is every one of Rhapsody's top 100,000 tracks streamed at least once each month, the same is true for its top 200,000, top 300,000, and top 400,000. As fast as Rhapsody adds tracks to its library, those songs find an audience, even if it's just a few people a month, somewhere in the country.

This is the Long Tail.
(Wired, 10-04)

Long Tail is a theory that defies our conventional thinking about the Pareto principle. Proponents of long tail theory suggest that the real value of a business, the place for the tightest intersection of profit and customer satisfaction is out in the top 300,000 to 400,000. That's where the niche is small and the customer desires so specific that you can really deliver service.

Price is a far less important issue out at the end of the long tail. At the front end, where everything is a commodity, price is the competitive question. Long Tail theory says focus on finding millions of niches of hundreds of people rather than hundreds of niches of millions. This counter-intuitive notion is the foundation of Google's success. The next generation of winners in our business will be Long Tail Players.

What's really amazing about the Long Tail is the sheer size of it. Combine enough nonhits on the Long Tail and you've got a market bigger than the hits. Take books: The average Barnes & Noble carries 130,000 titles. Yet more than half of Amazon's book sales come from outside its top 130,000 titles. Consider the implication: If the Amazon statistics are any guide, the market for books that are not even sold in the average bookstore is larger than the market for those that are (see "Anatomy of the Long Tail"). In other words, the potential book market may be twice as big as it appears to be, if only we can get over the economics of scarcity. Venture capitalist and former music industry consultant Kevin Laws puts it this way: "The biggest money is in the smallest sales."  (Wired, 10-04)

So what?

Our biggest single concern about the emerging referral business is that the players are not adequately focused on Long Tail realities. As we've been saying so loudly, networks are built on intimacy, trust and honesty, not database entries and email bombardment. Everything we see about the emerging referral toolset looks like mass emailing for the recruiting masses. While everyone talks about keeping the email on a leash, no one, underline that, no one, offers a tool that helps clients avoid obvious mistakes.

Clients of referral operations will default to mass emailing. It seems so much easier than real communications. It's like handing out shotguns without a training program.

Here's the math.

By next year, automated online referral systems will be handling 4% or 5% of total job transactions. The pitch is good, the price generally reasonable and the number of the companies offering the service is astonishing.

There are roughly 50 Million employment transactions per month, half already online, the other half, presumably filled by referral. At the low end, 4% would be 2 Million job transactions. Let's make it even more conservative and say that only 1 Million jobs will use the online referral process (That's a tiny 2%)

The referral tools we've seen seem to be designed to send between 100 and 2,500 emails per job. Let's pick 300 as a simple guess at the number of emails per referral.

That's 300 Million pieces of email, very, very conservatively sent out by referral companies in their first full year of business. But wait a second. Referral theory is that the first players in the network are not useful and that the candidate will come from the people to whom they forward the note.

If  5% of the folks who got the original note forward 20 copies of it, that's another 300 Million pieces of email. That's before the third bounce (where the real results of a referral program actually happen)

We're guessing that a 2% market share is a Billion pieces of additional email, more or less. If it was distributed evenly across the workforce, it would only be 6 pieces per worker. Of course, the distribution will be skewed towards the 40 Million college educated workers. IN the first year, at 2% penetration, they will each see about 15 pieces of mail. By the time referrals are 5% of the market (in two to three years), they could easily be the primary source of spam for most people.

Here's to hoping that the referral companies teach their customers prudent usage. We're doubtful. Effectiveness will be a long tail game, not a high volume shootout.

Don't forget to check out the blogs on bert.

- John Sumser © TwoColorHat. All Rights Reserved.

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