Marketing Strategy

The Pareto Principle: A Primer for Marketers on the 80/20 Rule

August 21, 2013 Posted In: Marketing Strategy Comments: 8

Perry Marshall

This is Part 1 in a three-part series on the Pareto Principle by Perry Marshall, author of 80/20 Sales & Marketing and The Ultimate Guide to Google AdWords. Read Part 2 and Part 3.

Many people have at least a passing familiarity with Vilfredo Pareto’s famous 80/20 discovery: Regardless of city or country, 20% of the people earned 80% of the income.

All sales people should know 20% of their customers write 80% of the purchase orders; software people know the final 20% of the software features consume 80% of the programming time.

The Pareto Principle is true of almost everything in business that you can count: Which products sell and how well, which customers are buying, which employees steal pens and pencils, how many customers open support tickets. Number of emails, size of file attachments, traffic on web pages.

A few years ago I held a seminar in Chicago called “The 80/20 Seminar for Direct Marketing.” It cost $3,000 to attend and I had about 80 people in the room. All of them ran businesses of one kind or another, most of them online. To illustrate the all-pervasive nature of 80/20, I said,

“Everybody stand up if you have shoes on.”

Everyone stood. I said, “If you own less than 4 pairs of shoes, please sit down.” A bunch of people sat down and 50 were still standing.

“If you own less than 8 pairs of shoes, sit down.”

More people sat down, about 30 left.

“If you own less than 16 pairs of shoes, sit down.”

Thirteen people, 9 of them women, still standing.

“32 pairs of shoes.”

Three women standing.

I smiled. “Don’t be embarrassed, ladies. Just tell the truth, cuz I’m illustrating a principle here. How many of you have more than 64 pairs of shoes?”

Two sit down. One left standing. She cringes with embarrassment.

“How many shoes do you have?”

“Umm, about 80.”

“Thank you so much. You can sit down now. Give this woman a hand!”

Everyone clapped. “20 percent of the people own 80 percent of the shoes. Can you see that?” I said. All nodded in agreement.

20% of the people own 80% of the shoes. 20% of the websites get 80% of the traffic and 20% of the web pages on your website get 80% of your traffic. 20% of the paragraphs on your #1 selling web page perform 80% of the persuasion. 80/20 applies to everything where behavior is rewarded, where there’s a positive feedback loop. 

Most folks are hopefully smart enough to realize that the effective 20% deserves far more of your time than the ineffective 80%. But that’s only the tip of the iceberg. Because 80/20 is a pervasive principle that governs almost all cause and effect. If you want to be super-effective, if you want to earn a high income, if you want to do so with minimal pain and suffering, you must thoroughly master 80/20.

In this article and the rest of this series, I’m going to explain a few more layers to 80/20 that almost everyone misses – and these insights are where the huge profits are.

The Pareto Principle is Infinite

If you have 1,000 customers, 80% of your business comes from 200 of them. But if we ignore the bottom 800 and just look at the 200 best ones, 80/20 is still true of the ones that are left. 80% of your business will come from 20% of the 200, which is 40.

If you ignore the bottom 80% of the top 40 customers, which only leaves you 8, nearly half of your entire business will come from those 8!

80% of the 80% comes from 20% of the 20%. So 4% of what you do produces 64% of the results. 80% of 80% of 80% comes from 20% of 20% of 20% — meaning that less than 1% of what you do produces 50% of your results. This is the power of 80/20² and 80/20³. You can keep going – 80/204 and 80/205 – until you literally run out of people or things or causes or effects.

In other words, 80/20 is an infinite, repeating, fractal pattern. This means very tiny causes produce huge effects. September 11, 2001 alters the entire texture of the 21st century, even though it’s executed by less than 20 people. One web page – Google’s home page – controls the lion’s share of traffic to most websites in the English speaking world.

80/20 Makes Scary Accurate Predictions

To help people harness the power of 80/20, I created an online tool called “The 80/20 Power Curve.” It enables you to make large predictions based on small amounts of data. For example:

Let’s say you read in the newspaper that Southwest Airlines is Company #167 in the Fortune 500, and their revenues are $15.7 billion. Based on that one piece of information, you can predict the size of every other company in the Fortune 500, and the total revenues of all the Fortune 500.

Here’s the graph:

80-20 Rule

It’s not just true of company sizes; it’s also true for donations to a church:

The Pareto Principle

And it’s also true of the sizes of cities in the U.S.:

Pareto Principle Graph

You can use the 80/20 Curve to infer huge amounts of insight from very small amounts of data. There are 7.1 billion people in the world and 242 countries. Based on that information, the 80/20 Curve predicts country #20 will have 61.2 million people.

How accurate is that guess? Wikipedia reports: Country #20 is Thailand with 65.9 million people. 80/20 is only 7% off. 80/20 is scary accurate. That’s because it’s essentially a law of nature.

If you know the median household income in California is $57,287, you reliably predict that 6% of California households earn over $357,000 per year. If you have 80 people in the room and 50 own more than 4 pairs of shoes, you can be sure that one person owns almost 100 pairs of shoes.

This is the Principle of the Hyper Responsive Customer: A tiny percentage of people have an insatiable appetite and will buy seemingly without limit.

Are you a sales or marketing professional? If your company has 500 customers who bought a $1500 product, 80/20 virtually guarantees you that 50 of them will spend more than $11,000 if offered the right thing. And one customer will spend more than $300,000 with you if fully and properly serviced. They possess both the capacity and the desire. All you have to do is figure out what they want.

In Part 2 I’ll add an entire dimension to this, tremendously expanding your sales capacity and marketing efficiency! Stay tuned.

Special Offer to WordStream Customers: Get Perry Marshall’s new book 80/20 Sales & Marketing (list price $22.00) for one penny plus shipping.

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Comments

Wednesday August 21, 2013

Victor Pan (not verified) Said:

The Pareto principle is everywhere in business, but we're also seeing a growing trend on its corollary - the long tail.

In the long tail scenario, the top 20% don't cover 80%, but rather the 80% covers a good portion of your business (let's say 50%). Figuring out if your business is following the 80-20 or the long tail is an important step in determining your online marketing strategy.

Wednesday August 21, 2013

Perry Marshall (not verified) Said:

Rarely is this the case. The long tail is certainly useful in some respects.But seldom does 50% of the available business come from the bottom 80% "long tail" but I'll even go further than that: online, not only is 80/20 almost universal, very often it's 90/10 or 95/5.

Wednesday August 21, 2013

Perry Marshall (not verified) Said:

From The Atlantic: http://www.theatlantic.com/magazine/archive/2013/09/the-most-valuable-ne... "In short, the 34-year-old project out of Bristol, Connecticut, is likely the most valuable media property in the US" A decade ago, ESPN chose to ignore Chris Anderson's "long tail" advice... "It turns out that when consumers have more access to content, the superstars get more super and the big bets from media companies pay off bigger. 'Demand isn't moving to the tail, it's moving to the head'" John Skipper, current president at ESPN: "We had strayed to food eating and gaming and salsa and horse racing and figure skating, and it just didn't perform for us...I had this quadrant with 2 axes: young versus old, and male versus dual audience." Skipper pushed the programming to the upper left quadrant (young and male) with an emphasis on live sports, especially red-blooded fare like big-time college sports and obsessive summer coverage of baseball. "We're not looking for niche audiences" Ratings started to change rather dramatically when this strategy was implemented. ...the gambit worked in large part because of the way long tails and fat heads interact...while the most passionate fans are drawn to obscure subjects in their sphere of interest...that doesn't stop them from tuning into mainstream coverage. In fact, studies show that these connoisseurs appreciate and seek out the popular entertainment as much as the obscure fare. So, ESPN has, in essence, turned would-be competitors into complementary players. On ESPN's notorious fascination with superstars, sports soap operas and celebrity: "It's not unlike PEOPLE realizing there are only five celebrities who really sell magazines, so why put anyone else on the cover"

Wednesday August 21, 2013

Steve Frandzeskakis (not verified) Said:

In your own shoe example, 20% of the people own 58% of the shoes.  This is nowhere near the 80% you claim.  Stop inventing results that do not exist when you can't even do basic arithmetic.

Thursday August 22, 2013

Simon Dunant (not verified) Said:

So many people don't want to believe this but the Pareto Principle is the fundemental law of business, if you are looking for the magic formula, the "secret" this is definitely one of them. You can indeed sell more to the 20% of raving fans of your business than you ever could ploughing time to conver the other 80%. As Seth Godin rightly points out, focus on your tribe, they'll be in the 20% - that's why running a business is tough, because only 20% of us can have the resilience to try, 20% of those who try are the ones that don't give up, and 20% of those succeed...

Nice post Perry...

Saturday August 24, 2013

Spook SEO (not verified) Said:

Awesome post. I myself am very concious with the 80/20 principle. I am because its disturbingly almost always true.
 
Thinking it helps put us in the right perspective as to how we should plan out our next campaigns and what kind of results we might be expecting. THanks for sharing. I hope to read the next post soon.

Sunday August 25, 2013

Randall Magwood (not verified) Said:

Great post Perry, and I definitely learned alot from your Adwords course. I've heard of the 80/20 rule and apply it in my business, but I do at a "top level" - instead of digging deeper and getting more intricate with it. Thanks for opening my eyes up to a new way of thinking about the 80/20 rule.

Friday September 06, 2013

Valentino Crawford (not verified) Said:

The Pareto Principle is mind-blowing! If more people understood this, there would be less people complaining about the top 20% income earners of companies getting 80% of the results. Understanding this principle, that means as long as the 20% of income generated by the 80% is enough for the 80% to live decent lives, then the business model of that company is a successful business model.

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