In school, we were all indoctrinated with the powerful business principles of the day, many of which we still use actively today. They go by names like: The law of supply and demand, The 80-20 rule and the law of diminishing returns.


Today, all business execs need to understand and add a new principle to their repertoire: The Long Tail.

The Long Tail has become a veritable catch phrase in tech circles, but is still relatively unknown outside of the digerati. First coined in 2004 by Wired Magazine editor, Chris Anderson, it was later turned into brilliant book by the same name. The Long Tail illustrates the viability and true business power of small niche markets. It is The Long Tail is responsible for the undermining many formerly dominant businesses ranging from Virgin Records to Blockbuster Video .

The principle is called The Long Tail because of the visual created by the above supply and demand graph. The vertical axis illustrates the popularity of a particular product, while the horizontal axis maps out the products, with the items lower in popularity (read: more niche) being placed further and further out to the right.

The far left or "head" of the graph contains the blockbuster hits. While it's the hits that typically get all the attention, one of the most fascinating discoveries of The Long Tail is that when you add up the sales in the "Tail" portion of the graph, in total the tail far exceeds that of the sales of blockbusters at the head.

Now, if you're Virgin Records and you have a physical store in a high rent district with limited shelf space, the smart move would be to carry the big hit records. You've only got so much space, so you fill your store with the 20% of records that account for 80% of all record sales. All is honky dory until Apple and their iTunes store comes along. Apple has no expensive physical store and no physical limitation or shelf space expense that limits how many products they can offer (ok it does cost something to store these songs in cyberspace, but we're talking fractions of a penny per song here, so don't nit pick).  This massive selection offers customers not only the homogonized hits that Virgin offers, but the ability for each consumer to delve into the niche they love — such as Cuban Jazz in the graph above. Then, when you realize the sales of all the Cuban Jazz like niches together give you more money than all your combined "hits", you get hit over the head with the obvious stick.

No wonder Apple beat the pants off an established competitor like Virgin. Same with Netflix and Blockbuster.

Do yourself a favor and don't wait until Harvard Business School makes this part of their curriculum. By then, like with Virgin and Blockbuster, it'll be too late.