In the book The Long Tail: Why the Future of Business is Selling Less of More (2006) by Chris Anderson, and in many subsequent articles about the long-tail, there has been much analysis on booksellers, DVD rental and music downloads companies, however little on financial services. My research, observations and experience in financial services suggest a different tail dynamic and performance.
For financial services - insurance, credit cards, loans, and mortgages – I have found three key areas that are vital for marketers to understand; 1) The Winners Curse – fear of the long tail, 2) The long-tail generates negative selection, 3) A self-reinforcing cycle of downward profitability.
Winners curse – fear of the long-tail
With more consumers using price comparison websites to shop for financial services, sites like Moneysupermarket.com in the UK, LowerMyBills.com in the US, or Redflagdeals.com in Canada, now rank and distribute hundreds products. My research found these sites create a long-tail and a “winner takes all” outcome with the highest ranking product in each category attracting the largest share of new customers. In his 1963 book Formal Theories of Mass Behaviour, William McPhee suggests the most popular product gets a disproportionate share of its audience creating a natural monopoly.
Source: MindShare ATG econometric models 2008
Most companies fear the long-tail because being number one on aggregator sites dramatically improves sales conversion rates. However hit products often produce a winner’s curse effect because the best product must deliver more value vis-à-vis the competition. To support these products companies offer reduced rates or premiums, expensive upfront incentives, free promotions or costly benefits to maintain the top spot. In some cases they pay higher commissions to the comparison sites, since many of these sites claim to be consumer champions however require more money to favourably rank your product. Subsequently, the best product drives higher volume but at lower margins.
The long-tail generates negative selection
As success online is concentrated in a few best selling products, for financial services it’s these products that attract more affluent, well educated consumers with higher incomes and better jobs. Because these consumers tend to be heavy users of financial services, more financially astute, and better at distinguishing superior products from middle-of-the-road ones. Consequently, products in the tail usually offer pricing or benefits of lesser value and attract more high-risk subprime consumers. The result is poor credit quality, higher delinquency or claim rates and larger charge-offs.
A self-reinforcing cycle of downward profitability
McPhee (1963) suggested a phenomenon called "double jeopardy" whereby niche products typically have fewer buyers than popular ones. Moreover, these consumers generally appreciate them less than they do popular products. For firms with multi-product portfolios, the non-hit products in the tail attract fewer customers and become smaller portfolios in relation to other products. Since risk management, customer servicing, operations and marketing efforts naturally gravitate towards growing and protecting the stars in the portfolio. This underinvestment creates a self-reinforcing cycle of downward profitability as the best (often of the worst) customers soon seek other products that offer better value. Thus the initial subprime qualities are amplified and the portfolio experiences high attrition rates, mounting losses and negative return-on-invested-capital. Anita Elberse (2008) Harvard Business Review found products in the long-tail will struggle to recover their marketing and production costs.
Implications for marketers and financial services companies
The long-tail has significant implications for customer usage and loyalty, such as credit card spending, intent to renew an insurance policy or ability to make loan repayments. So what can you do if your product is stuck in the long-tail?
1. Prioritize product development. Conduct a thorough analysis of competitors and comparison site tables where your products will be distributed. Then customize elements of your value proposition or use special introductory offers to strengthen your product to ensure you rank at or near the top.
2. Develop new customer loyalty programs. Offering a wide selection of products helps retain more heavy-users, deepen customer engagement and grow revenue per customer. However, regain control by targeting niche products at your existing customers via cross-sell or up-sell programs rather than advertising externally to new prospects via comparison sites.
3. Refocus portfolio management. Clean up your old product portfolios, close down high-risk customer accounts and convert the best customers over to newer products offering stronger value.
