Thursday, 24 July 2008

Long Tail Financial Services: Passion & Connection Require Social Network Services

Kevin Kelly has built on Seth Godin's discussion of the idea that there are "three profit pockets" on the tail of product popularity.

In brief, Seth says that the first two - at or near the head - are profitable for the creator, while the third - the long tail - is only profitable for the aggregator:
"The most common misconception about Long Tail thinking is that if you don't succeed at pocket 1, don't worry, because the tail will take care of your product and you'll just end up in #2. That's not true. #2 isn't a consolation prize for mass market losers. Mass market losers are still losers. In order to become a mass market star you make choices about features and pricing and quality--and if you lose that game, there's no reason to believe that those choices are going to pay off for a different market."
Kevin (with whom Chris Anderson agrees) says you shouldn't conflate the views of creator and aggregator, but view each section consistently from each perspective. True, because you then see clearly the challenge that each faces when products are in the long tail - albeit one that aggregators are able to meet more easily:
"...if we view the long tail as a market of a different type, as a market of enthusiasm and connection, then as the long tail expands, this increases the chance of two enthusiasts meeting, and so the longer the tail, the better. The first two pockets of the curve are trying to maximize profits; the last pocket of the long tail is trying to maximize passion and connectivity.

There is one further indirect advantage to the long tail. Since your creation now exists in a market (where it would not have existed at all before) it can, if you are lucky, start to migrate uptail."
This emphasises why creating a social network among interested buyers and sellers of each of the products, or sets of products in the long tail, becomes critical to maximising revenue from it. As discussed on Wikipedia:
"A social network is a social structure made of nodes (which are generally individuals or organizations) that are tied by one or more specific types of interdependency, such as values, visions, ideas, financial exchange, friendship, kinship, dislike, conflict or trade."
Facilitators' discussion boards, blogs and social network services all clearly help enable those buyers and sellers to find their type of interdependency - so do open marketplaces like online auctions, or simply knowing what people who bought one item also bought, or what other profiles they viewed, and so on. Ultimately, transparent, reliable, timely pricing and product description are key to sales.

Applying this to retail financial services is interesting, given current market conditions. Where's the passion? Well people get really passionate (angry) when there is significant change. The last time the most people got the most passionate about retail financial services was in the early '90s when many houses prices plunged into negative equity (the dotcom bubble-burst mainly affected the retail investment world - the preserve of far fewer consumers).

The Internet wasn't around commercially to help people get out of negative equity in the early '90s, but a whole "specialist" (and substantially sub-prime) mortgage industry ignited around the fact that 25% of the people who'd had a mortgage from a high street institution suddenly couldn't get one. Connectivity arose because their lawyers and other advisers knew that those clients who were "battlers" and worth a punt. They arranged loans from other clients or themselves, starting new mortgage and loan providers and brokerages in the process. All manner of strange, alternative finance deals became available - a veritable long tail of mortgages, secured and unsecured loans - and daytime television advertising hasn't been the same since.

Most recently, Northern Wreck sent a shock wave rippling through the UK population, and similar disasters are striking at US retail borrowing sentiment. But this time the Internet and social network services are there to facilitate connectivity amongst the passionate at the same time as the institutional and specialist mortgage market has panned. Coincidentally, social lending facilitators, like Zopa (2005) and Prosper (2006), are also on the scene, enabling individual consumers to lend and borrow at rates that suit them personally. Importantly, lenders decide how diversified they wish to be, and choose their borrowers. Zopa is still citing a default rate of less than 0.1%. These sites were started by people (and I confess to being one) familiar with the effect of both the dotcom bubble on personal investment as well as the early '90s issue of negative equity. They've had time to work on their propositions, strategies and tactics - the use of social networking tools being amongst them.

Of course, the long tail of products represented by online social lending did not really exist before (except perhaps more informally, off-line). These products are being created by the individual lenders offering their money, and the borrowers who post their requests for money (depending on the model operated by the relevant facilitator). Successful lenders, in particular, therefore challenge the notion that creators can't make money out of the long tail.

It's also worth keeping a look out for other shocks that signal passion in other markets - particularly those not yet disrupted by the Web 2.0 trend. Insurance? Pensions? I shudder to think of the disasters that will set those wheels in motion!
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