Dangers of Harvesting From “The Long Tail”

Cross-posted from my other blog.

Matt, another MBAMap blogger, wrote a piece recently about the long tail theory, a theory that’s gaining a lot of media attention lately. Slate also did a couple of write-ups on the theory. Today (08/07/06) NPR will have the author of The Long Tail, Chris Anderson, on for an interview. Read enough of the articles, listen to enough of the interviews, or simply read the book, and you’ll get an idea of what the long tail is all about. But, basically, the idea is that within the market there exist big products (say, a Hollywood film) and that big product spins off a long tail of other products (toys, games, collectibles…) where more money can be mined from many, smaller, transactions.

The idea of the long tail has become big news recently, but in practice business has made money this way for years; many of us have heard that Xerox isn’t in the copier business, it’s in the ink business. The question I decided to look at is where earning money “on the back end” may actually hurt the golden goose (the main product from whence the tail originates). I’ll focus, here, on the automotive industry, though my points should apply to other industries as well.

The automotive industry is rather more complex than one might expect it to be. There is, of course, the vehicle manufacturer (Ford, GM, Toyota…), and each of these manufacturers use various suppliers (Delphi, AC Delco, Bose…). The manufacturers take their sourced parts, build a car, and send it to independently owned dealers, perhaps through distribution companies first (such as the case with Toyota and their privately held partner Gulf States). The dealers get their cars from the manufacturer, but also match various F&I (finance and insurance) products to car buyers as well. The dealer sells the car or truck to the customer, and sells extended service agreements, maintenance agreements, GAP insurance, financing, body work, service, and after market equipment to the same customer. The car itself, of the utmost of importance to the manufacturer, becomes a means to an end to the dealer, who makes most of their money from all of the other items that can be sold along with the car, or the services that can be provided after the sale. While it isn’t at all uncommon for a dealer to make less than $1000 off of each car sold, it’s also expected that the dealer will make $3000-$5000 on each car in additional products and services.

In short, the automotive industry has an extremely long tail. I’ve heard before that 82% of jobs in America are connected to the automotive industry in some way. I’m sure that’s high, but probably not has high as it sounds when one considers that the insurance industry, the energy sector, even construction and food service would be fundamentally different if not for the car (I’m not sure whether one can directly connect a job at McDonald’s to the auto-industry, but it’s easy to see how many less of those jobs there would be if they didn’t need drive-thrus). For the most part the tail creates healthy economic activity, but there’s one link in the chain where I believe harvesting from the tail is doing more harm than good, and is possibly killing the Golden Goose.

Going back to the automotive dealer and remembering that a 2/3s or 3/4s of the dealer’s profit comes from something other than selling cars, one has to ask what the affect of these non-core transactions have on the core product. When a customer is about to lay down $30,000 for a new truck and is then offered a $2000 extended service agreement, rust protection ($500), pre-paid maintenance ($400), tire coverage ($300), and taken on a tour of the dealer’s real profit center, the completely packed service department (full of $25 per hour techs and $80k per year service writers), what does that really say to the customer about the quality of the vehicle that he/she is buying?

What happens, then, when the customer does go in for his/her 40k service? The $80k per year service writer and $25.00 per hour tech aren’t there just to change the oil and check the belts, they are there to “up-sale” service (more harvesting of the long tail…that can go on literally for years on each car). The tech goes over the car with a fine-toothed comb checking those issues which are known to be wrong with the particular vehicle (every manufacturer has hundreds of Technical Service Bulitins on each of it’s vehicles…more or less these are sales aides for the service department), they call this the 25, 75 or 125 point inspection. The customer then finds that their routine maintenance visit has uncovered $1500.00 in needed repairs to their 40k vehicle; and this customer didn’t even know that they were concerned about anything.

Enough years of this sort of harvesting from the tail and a manufacturer gets a reputation for poor quality. Take Chevrolet, for instance. They have no more or no fewer known problems (technically) than Honda or Toyota (as measured by Technical Service Bulletins) but Chevrolet has a reputation as being less dependable than Honda or Toyota…why is that?

I’ve got an idea about that as well. This is completely unscientific, but I’ve worked in the industry for ten years and I can say that Chevrolet dealers, and Ford dealers, push service to an extent that’s relatively unheard of on the import side. A Chevrolet dealer will know long lists of TSBs by heart for each vehicle that comes into their shop, while the Honda dealer will know only a couple of the biggest and most important ones. Import dealers also tend to sell different types of what are called “tech find” jobs (jobs that the technition finds on the vehicle inspections) than domestics do. A Honda dealer will routinely ask for control arm bushings even though a customer wasn’t concerned with the way the vehicle handled, but a Chevrolet dealer will sell the customer a differential that they didn’t know they were worried about.

None of this is to say that the Imports are “better” from a customers standpoint, they are simply behind. They’ve gotten much better at selling the F&I products over the last decade, and their service departments are becoming more professional and developed as well. If my theory of over-harvesting of the long tail is true, then we should be seeing, or soon see, the image of even Toyota and Honda as manufacturers of extremely durable and reliable vehicles ebb. Well, the July 24th issue of Automotive News has the president of Toyota begging mercy and claiming extreme self-disappointment over recent quality concerns surrounding his company’s products. Interesting, huh?