A recent post from Alex Danco, a startup founder from Montreal, sparked conversations about the vanishing state of “normal distribution.” In the provocative post, Danco argues that there’s a growing divide between top-tier brands (or products or publications) and everyone else, creating a two-class system of winners and losers.
“Either you [the customer] care about X, or you don’t. Either you care about Y, or you don’t. And what used to be the happy middle—the fat part of the normal distribution, where most of the demand is supposed to lie—is all of a sudden quite sparse. The world seems to be steadily moving in this direction: from one where our demands and preferences are normally distributed to one dominated by these weird, bifurcated, two-tier balances.”
Danco’s piece received some criticism due to its lack of data, but you actually don’t have to look very far to see evidence that he may be onto something. For instance, consider these examples:
- The singer Adele sold seven million copies of her latest record, 25, in its first five weeks alone in the U.S….while most artist fail to sell even one million or even a few hundred thousands.
- In the collaborative or sharing economy, one or two companies rule each sharing category in terms of brand recognition…leaving dozens of startups fighting for survival.
- In the smartphone market, Apple’s iPhone and Google’s Android dominate…while the rest have less than 3 percent market share.
- In media, few companies like BuzzFeed become giants despite the stunning number of websites and e-zines that launch every year.
- In retail, Nike has a 48 percent share of the the U.S. footwear market, eclipsing its closest competitor, Adidas (9.2 percent).
As Moz founder Rand Fishkin points out in his annual marketing predictions, Danko’s point is prescient.
And in fact, the examples mentioned above show that we’re in the midst of a “winner-takes-all” economy—one where, despite the abundant amount of choice available to customers, one or very few companies tend to dominate a category or an industry. It’s a phenomenon that is not necessarily new: data shows that from the mid-’90s, companies with large markets have seen their profit margins expand dramatically, while those at the bottom suffer shrinking returns.
(Photo credit: The Rich are Getting Richer by The Investor’s Field Guide)
The persistence of the winner-takes-all phenomenon flies in the face of the long tail: a theory proposing the shift away from a relatively small number of hits towards “a huge number of niches in the tail” of the demand curve. Driven by the digital revolution, the long tail economy is said to have opened up opportunities for more niche brands, products and services to enter the marketplace.
But, at least in the context of market dominance, the idea of long tail is proving to be false or at least overblown. In a world of abundant choices, the biggest, most mainstream players aren’t losing—they’re actually growing. Very few brands are leading the market, while others—those who used to be in the middle—are losing share and shrinking in size.
So, what explains the persistence of the winner-takes-all economy?
Robert H. Frank, an economics professor at the Johnson Graduate School of Management at Cornell University, offers an explanation in a February 2014 article for The New York Times. He thinks that people today are “more reluctant to sift through the growing avalanche of options confronting them,” so they focus only on what’s popular.
“The growing supply of social information may also be enhancing our opportunities for discussing films and books with friends,” he writes. “Consuming bestsellers has always made it easier to have such conversations, and the expansion of social media has reinforced that tendency.”
What the winner-takes-all economy means for brands
This economy offers serious challenges for companies. More than ever, companies need to find a way to become a dominant player in their industry. Be mediocre, and you risk becoming irrelevant. Be a small fish, and you risk getting eaten up by the competition.
Being number one, of course, is easier said than done given the relentless nature of disruption. Today, new competitors can come from anywhere—even from industries that don’t appear to be obvious threats. To remain competitive, companies must innovate for and with their customers. The brands that rise to the top are those that uncover something true about their customers—something to which their competitors have been blind.
Ultimately, the key to winning in the winner-takes-all economy is to continuously engage with your customers. To get closer to them, and find out not just what they do, but why. To have a deep understanding of their evolving needs and wants—and deliver on those needs and wants.
“The winner-takes-all economy reinforces that business success is about something very human.”
The winner-takes-all economy reinforces that business success is about something very human: it’s about building a relationship with your customers over time. In an age where mediocre, middle-of-the-pack companies are dying, companies need to recognize that the people they need to engage are the very same individuals they need to convince: their customers.