The 80/20 Principle, also known as the Pareto Principle amongst others, is a principle that most of us are possibly aware of but rarely use in our daily lives. That is really sad because we can use the Pareto Principle to manage our business or work far more effectively. Vilfredo Pareto, the Italian engineer and economist, had observed that in his country eighty percent of the wealth was owned by twenty percent of the people. Years later, in 1941, Dr. Joseph Juran stumbled upon Pareto’s work and recognized the Pareto Principle as an almost universal phenomena and called the principle “the vital few and the trivial many”.
The basic premise of The Pareto Principle is that where two related data sets or groups exist (typically cause and effect or input and output):
- 80 percent of output is produced by 20 percent of input, OR
- 80 percent of outcomes are from 20 percent of causes, OR
- 80 percent of contribution comes from 20 percent of the potential contributors.
- 80 percent of results come from 20 percent of efforts
- 80 percent of activity will require 20 percent of resources
- 80 percent of the results come from 20 percent of the workers
- 80 percent of revenue comes from 20 percent of customers
- 80 percent of complaints come from 20 percent of customers
- 80 percent of sales will come from 20 percent of sales people
- 80 percent of usage come from 20 percent of the features
- 80 percent of a restaurant’s turnover comes from 20 percent of its menu
And so on.
The precise ratio in a situation could be different to 80:20, but the principle does apply and in many cases the actual ratio may not be too far from the 80:20 rule. The principle has immense applicability in real life – always focus on the 20% that really matters; that is, the ones that are likely to produce 80% (or 70% or 90% or majority) of the results. Avoid the trivial. Unfortunately, most of us end by wasting our time, effort and resources on the not so important stuff. And this applies in almost everything that we do.
Obviously, the Pareto Principle has immense importance and applicability in marketing as well; let’s see how:
80/20 and Targetting
All of us do our region-wise/state-wise/city-wise analysis of sales. We are likely to find that the 80% of our sales are likely to be coming from 20% of the regions/states/cities. The Pareto Principle is extremely important to identify our priority markets and concentrate our efforts there. I am sure that many of us follow the Pareto Principle in targetting; equally, many of us don’t.
80/20 and Marketing Investments
Almost all marketers believe in multi-media campaigns, putting monies in TV, print, outdoors, radio, activation and, increasingly, digital. Even within, let’s say, a TV plan, we take multiple channels in the belief that we should not miss out on any potential consumer. We rarely try and analyse, post running a campaign, which of the media or vehicles gave us better bang for the buck. Because if we did, we will find that 80% of our campaign results came from 20% of our campaign messages.
John Wanamaker and others are said to have made this point: ‘Half the money I spend on advertising is wasted; the trouble is I don’t know which half.’ And he may have a point – we just don’t take the trouble to identify what has not worked and to plan our marketing investments as carefully and sensibly as we should.
When planning your marketing investments, do see that you concentrate more on the campaigns and media that are likely to deliver better results.
80/20 and Digital Marketing
Now that digital marketing is assuming immense importance, do note that the Pareto Principle is likely to work in this emerging media as well. Thus:
- 80% of your online sales are likely to come from 20% of products
- 80% of search visits are likely to be from 20% of the keywords
- 80% of leads in content marketing are likely to come from 20% of the content assets
- 80% of social shares are likely to come from 20% of the social updates
It is very likely that the sales team is always demand line extensions, colour variants and different pack sizes. Frankly, this is not smart strategy because confusion leads to a fuzzy brand. I mean, just take a look at Apple – it is the world’s most valuable company with just a handful of SKUs. If you were to analyse your product mix, you are likely to find that 80% of your sales are coming from just 20% of your products or variants. That should be enough to convince your sales guys to concentrate on the winners.
Here again, 80% of your profits are likely to be coming from 20% of your products or 20% of your customers. On the customer front, do identify your ‘gold’ customers and ensure that they get the royal treatment. Work out a special programme for them to see that they are never tempted to leave you.
The beauty of the Pareto Principle is that it is pervasive and infinite. Thus, if you have 1,000 customers, 80% of your sales are likely to come from 200 of them. However, if you were to look at just the 200, you will find that 20%, that is 40, are likely to account for 80% of the sales of the 200. And so on. Following this methodology, you will be able to identify the few star customers who are extremely crucial to your company.
The reverse is likely to be true as well. Of the balance 800, you are likely to find that 20%, that is 160, are likely to be contributing 80% of the sales.
A detailed microanalysis of this kind can help you target the important clusters of customers and devise effective reward and retention strategies.
It is important that you spend some time understanding the Pareto Principle and how you should be applying it, not just in your profession but in your personal life as well. Of course, for all its attractiveness, the 80/20 Principle is not always easy to apply, mainly because of two reasons:
- Can you identify in advance which 20% of your actions are useful? In some cases you can, in some cases you possibly cannot.
- Do the useful 20% always contain the same actions? For example, if in a given week, 80% of your sales came from 20% of your customers, would that hold true in the next week? Possibly not, since those who bought from you the last week may not buy the same quantity the next week.
In overall terms, the 80/20 Principle is an important concept. It has great applicability if we really try and apply it to any situation. So, even if you don’t want to get too ensnared in the principle, just thinking about it in any given situation may help you identify the important from the trivial and manage more effectively.
Visual courtesy: https://www.flickr.com/photos/duncan/