The Pareto Principle: A Primer for Marketers on the 80/20 Rule
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:
It’s not just true of company sizes; it’s also true for donations to a church:
And it’s also true of the sizes of cities in the U.S.:
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.
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