When individual transactions are very small, non-monetary costs dominate
Chris Anderson of Long Tail fame recently posed a question in a post on the economics of abundance: what happens when it costs almost nothing to produce and stock one more item?
One surprising result is that non-monetary costs dominate the transaction. Most of you are familiar with monetary costs - pay $0.99 to download a song from iTunes (or $0.10 from AllofMp3). However, as the monetary costs fall, the most important impediments to a transaction are non-monetary: search costs and psychic costs.
Some of you may have studied the concept of "search cost" in college economics. It is the cost of finding the item you need - often measured in time and effort, rather than money. When sorting through the list of all music ever released, it would take you forever to find that piece of music you'd actually enjoy. Even at $1 a CD, you'd probably buy nothing, because you'd give up long before finding anything you'd like.
That's why Amazon provides a variety of tools to help reduce search costs: recommendations, samples, listmania, and many other tools. Though not perfect, Amazon now leads customers to buy items they've never heard of before. (I discovered Pepe and the Bottle Blondes on Amazon because I like Pink Martini).
It is not enough for a company to aggregate lots of small things. Reducing search costs by matching content to users is critical for Long Tail businesses.
Of Searches and Psychics: The Costs of Long Tail Businesses
Thu, 2005-09-15 14:55.
