Chris Anderson developed The Long Tail Theory in Wired magazine back in 2004 to describe how economic business models of Amazon.com, Netflix, and others have created their riches. His book only recently came out.

A former Amazon employee described the Long Tail as follows: “We sold more books today that didn’t sell at all yesterday than we sold today of all the books that did sell yesterday.”

Similarily, the open source resource encyclopedia Wikipedia (which I personally hate) has grown in popularity by the amount of content offered. The majority of the content is provided by human editors. I believe the human editor evolution online is quickly catching on not only with Wikipedia but also the user driven site My Space which was recently purchased by Murdoch of News Corp.

Wikipedia, My Space, and Amazon all have soo many low popularity products and content that, collectively, they create a high quantity of demand. Below you’ll see Chris Anderson’s Long Tail theory in a nuttshell. It’s very catchy which is also its shortcoming.

The Long Tail Theory ‘L’ Shaped Graph

Online retailers account for a larger proportion of available products than traditional retailers. For example, the popular music source Rhapsody offers 19 times as many songs as Wal-Mart. The “unusual / diverse” array of tunes available from Rhapsody account for the larger vertical axis on the long tail while the shrinking horizontal axis of the tail accounts for the diversity of available products by online retailers. Consumers have been known to flock to these niche retailers.

The keypoint behind Anderson’s Long Tail Theory in business is that Long Tails will emerge when you can lower the cost of offering products and services. The lower the cost, the longer the tail will extend across it’s horizontal axis. The cumulative total of the horizontal access of products and services, collectively, extend the vertical access (If you’re lost, see the link above).

Below are three helpful rules, from a total of nine, that Anderson helps us to better explain “why the future of business is selling less of more.”

1. Near-zero inventory carrying costs:

If you plan to sell a few units of lots of things it can’t cost you much to keep those things in inventory. This is separate from the cost of production. It might cost Ferrari a lot of money to make cars, but if it will consign them to you for free, what do you care?If you plan to sell a few units of lots of things it can’t cost you much to keep those things in inventory. This is separate from the cost of production. It might cost Ferrari a lot of money to make cars, but if it will consign them to you for free, what do you care?Actually, you do care: there’s warehouse space, insurance, and shrinkage. Even digital content like music, movies, ringtones, and photographs require bandwidth and storage. Not only must the product be cheap to make, it must be cheap to keep in inventory.

2. Near-zero selling and marketing costs:

Long-tail products must either “sell themselves” or external people must sell them for you. If you have to send one email or take one phone call to sell a Cecilio and Kapono ringtone, you’re dead. (Don’t know who Cecilio and Kapono are? That’s the point.) This is where two cool concepts butt heads: long-tail versus wisdom of the crowd. The former says a market of one is good. The latter says that when lots of people buy something, it’s probably good. How then does one person find something that’s good for her out of the millions of products to buy when there’s no crowd to follow?

3. Near-zero support and training costs:

Do you see a pattern developing? One support call or email, and you’re dead too. Your offerings must either require near-zero support and training, or other people must support it for love and glory.