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What Really Is the 80/20 Rule?

You’ve probably heard of 80-20 rule (also known as Pareto’s Principle), which when applied to business, states that 80% of your sales come from 20% of your consumers. Seems nice and tidy right?

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If it were true, it would definitely simplify your marketing efforts and narrow your focus to your most ‘valuable’ buyers. Unfortunately, doing so may dramatically limit your opportunity for success.

In 2007, Byron Sharpe and J Romaniuk from the Ehrenberg-Bass Institute for Corporate Sponsors, concluded research that showed the ratio to be more along the lines of 60/20 (at the high end).

When they analyzed brands across many categories over the course of a year, they found that all brands, regardless of their market share, typically could attribute 50% of their sales to the top 20% of buyers. That means another 50% of revenue came from the remaining 80% of consumers!

The implications are far reaching, and on the surface, we can see that long term engagement with your less frequent or light spending buyers could prove more valuable than you once believed. Over time, they may even scale up to the top 20%, even if just for a short period of time.

Next time you are thinking of ways to improve sales, take a hard look at the buying patterns of your customers. Look for those who may have dropped out of the 20%, or have always been just a bit outside. That pool will be much bigger than you previously believed and could be the source of your greatest gains to come.

Please share this post with someone who still believes in the 80/20 rule!

 

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Mavriko Marketing is a business consultancy that helps companies Make Their Move™ with better strategy, digital marketing and design. If you’d like to improve your bottom line, contact us today!  anthony@brandmavriko.com