Get rich selling unpopular products

Ingenuism Weekly 39

“The history of computing . . . is the story of probing innovators learning from one another, combining ideas from multiple sources, and introducing new products and technologies that evolve from those preceding them.” –Ron Friedman, Decoding Greatness

MEDIA

Decoding Greatness – Silicon Valley Examined 28

In this episode of Silicon Valley Examined, Robert Hendershott and Don Watkins discuss the book Decoding Greatness by Ron Friedman, and explore how the principles of Ingenuism can help individuals become more creative and successful.

Listen on Spotify or iTunes.

INSIGHT

Get rich selling unpopular products

Robert Hendershott and Don Watkins

The traditional recipe for a successful business is to create something everyone wants. These popular mass-market products generate massive sales. Think Marvel’s Avengers and Spiderman movies. Stephen King books. Apple’s iPhone.

The downside of this recipe is that not everyone likes superhero movies. People have personal tastes and mass-market dictates that one size fits all. Twenty years ago, those more nuanced tastes were hard to satisfy. You might get lucky and find a local store that carried t-shirts of your favorite indie band, but there was nothing like Etsy, where you can find all kinds of apparel featuring every band, book, or movie imaginable.

Etsy is an example of a long-tailed business. Long tail businesses are different from mass market businesses: they thrive precisely by catering to many less-popular niche markets. Long tail business models turn the traditional approach—large sales of a few dominant products—on its head: long tail businesses sell a small number (each) of many, many more obscure niche products.

To visualize the long tail, imagine all products in a particular market, ranked from the best seller down. The top-selling products are the “hits” that appeal to the mass market and the low-selling products are niches that appeal to smaller markets. There are a few hits and many niches, which together make up the long tail. While the hits have much higher sales individually, the large number of diverse options in the long tail mean that there are more potential total sales in the tail. 

Long tails potentially exist when customers have widely varying preferences (which in a global market is given) and in practice exist when there is a way for buyers and sellers to connect in the tail. In the absence of a mechanism connecting buyers and sellers, the tail remains inaccessible. But it is still there, an opportunity waiting to be capitalized on.

There are practical challenges to tapping into the long tail. One is physical space. It is easy (and likely lucrative) to stock or show dozens of hit products. It is more difficult and expensive to stock or show thousands (or millions) of niche products. It is easy for customers to browse through and choose from a few dozen hits. It is harder for customers to successfully navigate the long tail. Everything that you like is lost in the swamp of all those products that you don’t (but someone else does).

Consider books. Is it a better business opportunity to offer and sell many copies of Harry Potter or to add thousands of niche cooking books? To show blockbuster films or niche documentaries? To play Taylor Swift or esoteric music genres and bands? Although the total sales from many niche products could dominate the sales from a few mass-market products, effectively and efficiently providing the long tail is hard. How do the customers looking for their niche product find it in the morass of niche products that other people want? 

The rise of the internet supercharged long tail business models by:

• reducing the need for physical space

• reducing the cost of offering niche products

• enhancing discoverability through search functionality

• enabling reviews and recommendations that let customers discover the niche products they want, often including some that they didn’t even know they wanted

• creating positive feedback loops that dramatically expanded long tails

Prior to the internet, the key to retail success was getting the right products on the right shelves at the right time. Optimizing scarce shelf space led to Walmart’s dominance. But in online retail shelf space is unlimited. Now the challenges are filling those unlimited shelves and helping your customers navigate all that virtual shelf space (the long tail).

One way is for every customer to see different, personalized products and content. But how do you know the right products to show each customer?

Although enabled by the internet, Amazon/Netflix’s key innovation wasn’t using this new channel to sell/stream online. Their primary contribution was innovating how they organize and present products—how they help their customers negotiate the long tail. Shopping stops being a random exercise limited to browsing the limited number of available products/titles that happen to be on a particular store’s shelves. Personalized recommendations and user reviews allow each customer to browse and find items that interest them. The result is more sales from the tail than from the hits.

And as the tail becomes accessible, it grows. YouTube has widely varying content that appeals to the full spectrum of video customers and is easily accessible, making it the go-to for viewers looking for content and the first place creators post their videos. Creators and sellers getting access to their particular niche audience boosts the incentive for creating niche products and content, the absence of which would otherwise stymie its production. 

The results are staggering. On YouTube, billions of users have access to billions of videos. Amazon’s CreateSpace provides self-publishing tools and distribution for budding authors, along with access to Amazon’s massive customer base. The result is far more videos being shot and viewed and many more books being written and read. 

Further, while the internet is the key enabling technology for long tail business models, the products in the tail do not have to be virtual. AirBNB offers long tail access to vacation rentals while Etsy offers long tail access to creative and unique craft productions. 

Long tail business models also underpin what is generally being referred to as web3, in particular crypto and non-fungible tokens (NFTs). More than eight thousand different cryptocurrencies have been created and something that is “non-fungible” is by definition unique, the ultimate niche product. Cryptocurrencies are also network products and leading crypto currencies may end up being stealth business models. NFTs could mimic the growth of YouTube and TikTok, enabling massive new categories of content. 

In a connected world, customers can learn from each other’s’ experiences through reviews, and recommendations give us an unprecedented level of personalization that satisfies our individual tastes rather than the one-size-fits-all of the mass market. Savvy companies like Apple have designed their mass-market products to be configured at the customer level, creating long tails (e.g., the iPhone’s App Store).

Long tail business models have played an important role in creating the miracle of the 21st Century and continue to be a key opportunity for progress and value creation going forward.

QUICK TAKES

The progress movement finds a home

This is a promising sign that the progress movement is congealing into an actual movement. Alec Stapp recently tweeted:

For the last 6 months, @calebwatney & I have been building a think tank

It’s called the Institute for Progress (@IFP) & we’re so excited to share it with you

Our mission is to accelerate scientific, technological, and industrial progress while safeguarding humanity’s future

Check out the group’s launch essay, “Progress Is A Policy Choice,” which does a good job of laying out today’s policy barriers to progress and opportunities to promote progress. It also explains why IFP will start out by focusing on three key issues: metascience, immigration, and biosecurity.

Related: Derek Thompson writes about a story we’ve been covering…the flowering of projects by tech leaders and progress champions to improve science.

The progress movement searches for a philosophy

What is it the progress movement stands for? Jason Crawford argues that for the progress movement to be a movement, it needs a philosophy. He suggests three core premises:

• Progress as a historical fact

• Humanism as the standard of value

• A belief in human agency

As Jason notes, this leaves open a lot of room for debate, and importantly explicitly avoids political premises:

I’ve deliberately left out any explicitly political premises. The progress community includes a variety of political opinions, from libertarians to progressives. Just recently, we’ve had Eli Dourado emphasizing the role of regulations in slowing growth; the Innovation Frontier Project proposing increased federal spending on R&D in geothermal energy; and Ezra Klein advocating increased economic growth so that there’s more to redistribute to the poor. I would like the concepts of progress, humanism, and agency to serve as common ground from which we can have productive debates. With a shared goal, we can examine what policies and principles actually achieve that goal, and everyone can try to prove their case with history, economics, ethics, and logic.

I’ve been saying for a while that part of what’s exciting about a movement centered around progress is that it cuts across tribal political lines. But I agree with Jason: that can’t mean that the movement is agnostic about everything across the board. There has to be a shared set of ideas and values, and Jason’s list seems to me like a solid start.

The future of work?

Ben Schecter makes the case that web3 will wildly reduce the importance of companies, and goes into a decent amount of detail as to how that might work. The piece is hard to excerpt, but here’s a good explanation for the problem web3 is solving.

Increasingly, traditional corporations have “orbital stakeholders,” or participants that blur the line between internal and external members of the organization. Consider Apple and the developers that create App Store Apps, YouTube and creators, or Uber and their drivers—participants are contributing to companies’ bottom lines from the outside, but companies are having a difficult time aligning incentives with these stakeholders. 

As companies grow, they are no longer able to maintain a sustainable relationship with these orbital network participants. The relationship between the company and the participants turns zero-sum, and in order to maximize profits, the company begins to extract value from these participants. 

The basic idea is that with web3 there will be a much smaller gap between adding value to a network and capturing value. It’s all pretty speculative, and as Ben acknowledges there are some real barriers to this taking off. But where I definitely agree with Ben is that the “future of work is emerging and it will go in unexpected and fascinating directions.”

You can’t centrally plan Silicon Valley

In the past, we’ve talked about how the internet is allowing for the geographical distribution of technical talent. Connection at a distance is a good thing! But what is the optimal amount of connection at a distance versus geographical concentration?

I sure as heck don’t know. That has to be discovered through trial and error. But Congressman Ro Khanna thinks he knows and wants the government to try to turn the entire country into Silicon Valley.

Americans should not have to leave their hometowns in order to seek opportunity or build wealth. . . .

What we need are economic policies that seed digital jobs all over the country, even while places like Silicon Valley continue to attract talent and prosper.

The federal government should create a national digital corps, bringing the brightest minds in technology to universities, community colleges and local businesses to spend three to six months building effective credentialing and apprenticeship programs and mentoring newly trained workers. Like the Peace Corps, participants would receive a stipend for living expenses and would enhance their own resumes while developing a better understanding of rural markets and the economic opportunities there. Digital corps fellows would play a supportive role, recognizing that the communities themselves must drive new initiatives.

With the help of these fellows, the country can mobilize its vast higher education network for the task of training new tech workers from coast to coast.

One of the principles of Ingenuism is an openness to experimentation. But this experiment has been run…a lot. Governments all over the US (and the world) have attempted to create their own versions of Silicon Valley. And it doesn’t work.

The other corona

The top layer of the sun’s atmosphere is called the corona. And, yeah, we’ve gone there. Recently NASA announced that a probe successfully reached the sun.

The Parker spacecraft left Earth in 2018, and is traveling on a long loop around our star, making periodic visits. The spacecraft, built by the Johns Hopkins University Applied Physics Laboratory in Maryland, is designed to withstand the extremes of flying so close to our wonderful, scorching ball of nuclear fusion and dipping into its atmosphere, for a few hours, at least, to swim through sizzling matter. Getting there at all took a bit of work too. Reaching the sun is, remarkably, more difficult than reaching the outer planets, or leaving the solar system altogether. Earth travels around the sun at great speeds. A spacecraft bound for Jupiter, for example, can use that momentum to fly faster. But a spacecraft bound for the center of the solar system would need to slow itself down instead, so that its orbit shrinks instead of widens, and it can start moving closer to the sun. Existing rocket technology can’t achieve this effect, so engineers must take Parker past Venus seven times throughout the mission, so that the spacecraft can use that planet’s gravity as a brake.

Honestly, I find this more astonishing in some ways than sending human beings to the moon. I mean, we’re visiting the sun! Multiple times! With something that can withstand a temperature of 2 million degrees Fahrenheit. (This was fascinating by the way: “the sun manages to heat its atmosphere to 2 million degrees Fahrenheit while its surface stays a comparatively cooler 10,000 degrees.”)

Human beings have now sent stuff from the sun to Pluto and beyond. Incredible.

Until next time,
Don Watkins

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