An underlying principle of economics is scarcity. Resources (time and money) are limited and, from a corporation’s perspective, they thus need to be delegated towards the market which will provide the greatest return. This market is known as the lowest common denominator. In an industrial business model, this means sacrificing potential sales from niche markets and instead producing goods or services which appeal to the masses. This is often at the expense of creativity and innovation.
This concept can be illustrated through a naturally-occurring phenomenon called a power-law distribution, or the long-tail effect.
The diagram shown above represents a typical power-law distribution. Let’s use the paperback book industry as an example. The vertical axis measures the popularity of each book, and the horizontal axis measures the quantity of books sold. The green portion of the distribution illustrates the aforementioned lowest common denominator, or the largest market for books. The area represents some 20% of the total books which generate roughly 80% of the book market (as stated by the 80-20 rule). It is therefore efficient for a book store to focus on selling that 20%. The remaining 80%, dubbed the ‘long tail’, represents the niche markets which are rarely addressed by companies, simply because the returns are far too small.
In focusing on such a small percentage of books, these niche markets become somewhat abandoned. If I walk into Dymocks looking for the latest J.K. Rowling novel, I am likely to leave the store satisfied. Conversely, if I walk in looking for a book on the impact of global warming on the plumbing industry, I am much less likely to have that want fulfilled. Bookstores have limited physical space to hold stock. Scarcity stifles innovation and creativity.
Enter the internet . . .
Scarcity? Nah. Limited space? What are you talking about? The economic need to appeal to the masses? Tell me you’re joking.
A dynamic new paradigm is taking place, characterised by the internet’s immunity to scarcity and the laws of economics. Take Amazon, for example. Shelf space is now online and infinite; there is no need to even consider the power law distribution. As long as one person on the planet desires a book, there is benefit to it being marketed, no matter how small or insignificant that niche. The lowest common denominator doesn’t need to be considered in the same way as it once was, and it no longer defines the market. Specialised and creative niche markets are becoming profitable nowadays, which demonstrates the dynamic new paradigm pushed forward by the internet.