Why the Popular Becomes More Popular: How Demand Concentrates When Product Variety Increases
Abstract:Ever wonder why Disney's Marvel superhero machine keeps audiences coming back for more? The recent follow up with "Captain America: The Winter Soldier" after "Thor: The Dark World" satisfied a large swathe of movie audiences. New research by ITOM Professor Tom Tan and co-authors reveals why popular movie titles keep getting more popular. The new findings run counter to the trendy "long tail" effect that captured the imaginations of researchers and marketers. The study shows that consumers tend to watch more and more hits as product variety grows.
Ever wonder why Disney's Marvel superhero machine keeps audiences coming back for more? The recent follow up with "Captain America: The Winter Soldier" after "Thor: The Dark World" satisfied a large swathe of movie audiences. Is there something behind the demand phenomenon besides humanities' love of good conquering evil? New research by SMU Cox ITOM Professor Tom Tan and co-authors reveals why popular movie titles keep getting more popular. The new findings run counter to the trendy "long tail" effect that captured the imaginations of researchers, product developers and marketers.
Increasing product variety diversifies demand for each movie title away from both popular movies or "hits" and niche products. However, the findings show that product variety nudged demand away less significantly so for hits than for niche products. These hit or niche movie titles are defined in terms of rental rankings, such as the top or bottom 10% of all of the movies in a month. Importantly, product variety actually increases the demand for hits and decreases the demand for niche movies in the aggregate -- contrary to the “long tail” effect. They also found that heavy users are more likely to venture into niche products than are light users, which are the majority of the market.
Tan explains some of the dynamics at play: "In the online world there are more advanced search engines and recommendation systems that help people find the products they want or were not aware of. Because of recommendations, they learn about products, and also consider the niche producers. At the same time, the number of products available, or variety, is much greater than before. Relative to these trends however, people still concentrate on popular products."
Long tail effect in practice
Given product proliferation, people will search to find what is good enough and then stop, keeping to a limited set of products, Tan explains. "Consumers tend to select products that are well publicized, heavily advertised, or based on word-of-mouth," he notes. Those products Tan refers to tend to be the hits, or popular products; consumers then do not venture into niche products as deeply.
The “long tail effect” predicted that, due to the introduction of the Internet, niche products would comprise increasing market share, while the demand for hit products would continue to decrease. Anderson, the editor of Wired Magazine who coined the term, suggested that niche products would continue to better satisfy consumer preferences and the Internet’s expanded product variety would make even the most obscure products available to the masses. Really, the long tail grew a taller head, Tan suggests.
A long tail strategy implies product assortment decisions to be made; advertising dollars to be spent; and supply chain management of these products on the Internet. This hypothesis also suggested that the Internet reduces production and distribution costs of niche products. For consumers, both active and passive search and personalization tools would lower search costs and hence allow consumers to find these niche products. Nevertheless, in spite of expanding online search tools, expanded product variety may further escalate search costs. Some research finds that the impact of online user reviews, a key demand factor, are weakened by expanding product variety.
The research finds
The authors' large data sets from the movie rental industry evaluate the impact of product variety on demand concentration. It captures the effects of changing product variety over time, and whether or not the demand for niche products increases amid an ever-changing product variety. The study data consist of the DVD rental "turns" from January 2001 to July 2005. They also collected consumer-level data from Netflix movie reviews. Product variety, the number of distinct movies rented at least once, increased considerably from 7,246 in 2001 to 25,488 in 2005. Total rentals saw more than a threefold increase, going from 162 million turns in 2001 to 546 millions turns in 2004. For each title, the average turns appear to be stable.
By 2005 however the most popular movies were likely to contribute to an increasing market share. The number of brand new titles increased from 1,639 in 2001 to 3,879 in 2004, while the newly rented back catalog titles decreased from 5,607 in 2001 to 3,707 in 2004. Product variety growth was primarily due to the introduction of brand new products, but these newly added products are neither predominantly hits nor niches.
At the consumer level, Tan and co-authors find that it is mostly the heavy users or the “movie buffs,” a small fraction of all consumers, that venture into niche movies, thus causing the demand to still concentrate on the hits. In addition, according to their analysis of ratings data, niche movies are not as satisfying as hits or believed to be of as high quality. This moderates a claimed benefit of niche products -- that they satisfy people’s tastes better.
Word of advice
The study showed that consumers tend to watch more and more hits as product variety grows. Expanded product variety may threaten the attraction of one popular movie because of demand diversification, but it may favor more and more popular movies. Light users, a majority, tend to focus on popular items, therefore hits continue to drive the market. Also, niche products are not more satisfying as promised than hits, the research found. As the Internet channel continues to offer expanding product variety and new recommendation systems, how should decision makers respond?
Companies like RedBox remained profitable by focusing only on a selected number of hit movies. They captured 34.5% of rental market share in 2011. This was in competition with Netflix-like companies that stock numerous niche titles. Amazon.com, offering numerous long tail products, sells most of its niche products by third-party sellers because of insufficient demand.
"Product variety increases the desire for or popularity of hits, which goes against long tail predictions," surmises Tan. Firms started to consider their niche strategies more after the long tail idea arose, but niche products carry certain costs to develop.
Tan advises firms that their hits need to be well managed and stocked up. "The RedBox business model is successful because they only stock hits in kiosks," he adds. Importantly Tan advises managers to make the best use of hits or popular products, then think about other strategies. Relative to niche products: think about ways to encourage trial and consumption to monetize them, offers Tan.
Netflix, Amazon, Hulu and Vudu, which allow movies and content to be streamed, may increase the number of heavy users who discover niche products, Tan offers. The demand concentration would need to be re-examined in this context. Demand concentration in other product categories may respond differently to varying product variety levels.
Given the lowers costs associated with streaming content, consumers may stream more frequently than the traditional DVD channel. In the streaming world, Tan anticipates that demand for niche products will increase but variety will also increase, which may cancel each other out possibly. "I cannot say which side wins or will dominate," he concludes. "Overall, consumers are generally much more satisfied by hit products than by niche products."
The paper, "Plenty is No Plague, or Is It? An Empirical Study of the Impact of Product Variety on Demand Concentration" by Tom Tan, Cox Business School of Southern Methodist University; Serguei Netessine of INSEAD; and Lorin Hitt of the Wharton School, University of Pennsylvania, is under review.
Written by Jennifer Warren