Pareto Principle in Product and Marketing
Spoiler: It doesn't work as you would expect it to
Let’s understand Pareto Principle first:
The 80/20 rule, also known as the Pareto Principle, states that roughly 80% of the effects come from 20% of the causes.
It was named after Vilfredo Pareto, an Italian economist who noted in 1906 that about 80% of the land in Italy was owned by 20% of the population.
This principle has been used/misused by a lot of people, suggesting that a small percentage of input often leads to a large percentage of the result.
Illustration in case of the product and marketing:
Seems all right. Isn’t it?
NO!
I started reading Byron Sharp’s book: “How Brands Grow” and here is a catch - ‘80/20 law’ is a misleading simplification. The ratio is rarely as extreme as 80/20.
Case 1
Sharp’s research measured the “fast moving consumer goods” pareto share across 3 months was “35%”, and over a year it could only go up to “50%”.
What does this mean?
The 20% heaviest buyers account for 50% of purchases.
50% lightest buyers account for 20% of purchases.
Middle 30% of buyers account for 30% of purchases.
In short, 20:30:50 buyers accounting for 50:30:20 purchases. ( Professor Gerald Goodhardt’s 20:30:50 law)
Case 2
Think of petrol/gas consumption for car.
Group 1: Doesn’t own a car but occasionally buy fuel for a rented car.
Group 2: Owns a car and buy fuel once a week.
Group 3: Owns a car, drives a lot and buy fuel 2-3 times a week.
Your Group 1 will be missed in the short duration of measurement and if you expand your time for measurement it is a possibility that Group 3 shifts to Group 2 or vice-versa.
What does this mean?
The way the lightest buyers became heavier and the heaviest buyers became lighter is a ‘regression to the mean’ phenomenon. (which he calls ‘the law of buyer moderation’)
Conclusion
So we have three key facts about product and marketing’s Pareto law:
1. It is law-like and applies across brands and categories.
2. It’s not as severe as 80/20.
3. The analytical time period affects Pareto metrics and messes up target customers based on customer value.
Put simply, next period your heaviest 20% of customers won’t be so heavy, the light buyers will be heavier, and some of the non-buyers will buy. This is the law of buyer moderation.
Next time when you use the Pareto Principle, be careful it depends on the time frame.
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