Chances are, you’ve heard of the Pareto Principle. But do you understand it? It goes under various monikers: “the 80-20 Rule,” “the Law of the Vital Few” and “the Principle of Factor Sparsity.” It has far-reaching implications. And its idea is simple, yet profound: 80 percent of the effects come from 20 percent of the causes.
Its genesis, interestingly, was a revelation about Italian land-ownership patterns: Italian economist Vilfredo Pareto (1848-1923) discovered in the course of his research that most of his nation's land, around 80 percent, was owned by just a few powerful people: 20 percent of the population.
Pareto was surprised by this finding; and, to his astonishment, when he did more research, he learned that the major proportion of land in other countries and regions was owned by roughly 20 percent of the population in those places, as well.
The Pareto Principle, then, was first applied to wealth distribution. Later, it was proved to be operating in other arenas, too, from gardens and shoe ownership to crime rates and business:
- 20 percent of the pea plants in a garden produce 80 percent of the peas. (Legend has it that this was where Pareto first conceived of the principle.)
- 20 percent of the salespeople make 80 percent of the sales.
- 20 percent of the people in any given company earn 80 percent of the profits.
- 20 percent of your time can produce 80 percent of your results.
- 20 percent of your customers represent 80 percent of your sales.
- Software engineers spend 80 percent of their time on 20 percent of the software’s features.
- 80 percent of the shoes owned by a group of people are individually owned by 20 percent of those people.
- 20 percent of the hazards in a workplace cause 80 percent of the injuries.
- 20 percent of the healthcare patients in the United States use 80 percent of the healthcare resources.
- 80 percent of crimes are committed by 20 percent of the criminals.
Pareto, actually, seems to be everywhere we look.
The Pareto Principle, abused
As pervasive as the Pareto Principle may seem, however, it’s not a magic trick. It’s a principle, not an inviolable law of the universe. More precisely, it’s a trend -- something that happens most of the time. Yet, because it’s so simple and easy to understand, it is applied indiscriminately to vast areas of life, business and human activity. Some businesses have fallen prey to the Pareto trap, making major pivots that are supported only by a flimsy principle rather than real and actionable data.
The best business information should come from your own analytics, your own testing and your own research. The Pareto principle can aid your thinking and advise your strategy, but it should not dictate your every move.
The Pareto Principle on steroids
The Pareto principle by itself is pretty exciting. But it can be taken even further. Marketing strategist Perry Marshall has taken Pareto to its logical extreme. He calls it the “explosive potential of 80/20” and discusses “how deep, how potent 80/20 really is. It’s the most powerful compound interest on earth.”
Marshall has also called the Pareto Principle exponential: Let’s say that 20 percent of your customers are responsible for 80 percent of your sales. Now, take that 20 percent and analyze it. What you’ll discover is that 20 percent of that group (20 percent of 20 percent) are responsible for 80 percent of those sales. And then, if you take that 20 percent, you can apply the Pareto Principle again!
Writer Dave Lavinsky has explained that "The Pareto Principle scales to the third power and fourth power, and so on, when the numbers are great enough." Marshall says that it is infinite.
Infinite or not, the principle provides some powerful applications in marketing. Here are some things you should know:
1. Eighty percent of your profits come from 20 percent of your customers.
This is the most common observation of the Pareto Principle. Thankfully, it’s pretty easy to find out whether or not it holds true for your business. If you find that the bulk of your profits comes from around 20 percent of your buyers, then make sure you’re working hard to retain those customers and treating them well.
In addition, you'll want to find more customers like them. Marshall, the marketing strategist, recommends the following techniques for finding that powerful 20 percent of your customers:
- Identify customers who have bought recently, frequently and spent the most.
- Find out where those 20 percent come from -- the traffic channels that they discovered, the ads on which they converted and the content with which they engaged. Optimize, enhance and promote that content.
- Perform a demographic and psychographic study on your 20 percent. The better you get to know them, the better you can target them.
You should stop spending inordinate amounts of time on the few customers who spend paltry amounts. Focus on your best customers -- and that will usually mean only around 20 percent of them.
2. Eighty percent of your online product sales come from 20 percent of your products.
What products do you sell? If the Pareto Principle holds true for your business, then you’ve got some hot sellers, responsible for around 80 percent of your sales. These are the products that you should work to enhance, promote, advertise and push. They’re hot sellers for a reason, so make the most of them.
3. Eighty percent of your visitors come from 20 percent of your keywords.
Many companies spend a lot of time developing keywords, forming a keyword strategy and applying those keywords across their website. But here’s the surprising thing about keywords: In most cases, 80 percent of your traffic and visitors come from a mere 20 percent of your keywords. I’ve found that the ratio is usually even more weighted than that.
Take a peek at Google Analytics or SEMRush to find out if this is true for your business. My site, quicksprout.com ranks for a lot of keywords, but there are only a handful of traffic drivers within them. The keyword “online marketing” alone is responsible for more than 13 percent of my traffic. And, because this is true, it makes sense for me to:
- Focus content on online marketing.
- Serve the users who want online marketing information.
- Provide even more detailed and helpful information on online marketing.
4. Eighty percent of your content marketing leads comes from 20 percent of your content.
You already know that content marketing is powerful. But do you know where your content marketing leads are coming from? If your experience is like mine, you’ll find that most of your leads and traffic come from just 20 percent of your content assets. When I ask my clients to analyze their content marketing resources, they usually discover one evergreen piece of content that continues to drive tons of traffic.
I identified my own top-performing content assets and milked them for all they were worth by turning them into long-form guides.
5. Eighty percent of your social sharing comes from 20 percent of your social updates.
Take your social sharing into consideration. Where are all those likes, plusses and retweets coming from? They’re probably coming from just 20 percent of your updates. Using a social analytics tracker, find out the features that your high-performing social updates have in common and apply them to your other updates.
6. Eighty percent of your traffic comes from 20 percent of your traffic channels.
Every website receives traffic from a variety of sources. I keep a close eye on my traffic channels to see where I’m gaining most of my referrals. A quick glance at Google reveals the top referral sites. According to Pareto, you’ll gain most of your referral traffic from just a few of these sites.
7. Eighty percent of conversions will be generated from 20 percent of your pages.
In conversion optimization, you need to focus on the 20 percent best converting pages. The better you optimize these pages, the more conversions you’ll be able to gain.
8. Eighty percent of sales come from 20 percent of advertising channels.
When you take into consideration your advertising channels, you probably use adwords, retargeting and perhaps some site-specific banners, or other outlets. Where are most of your sales and leads coming from? Focus on the channels that produce the most.
9. Eighty percent of customer complaints come from 20 percent of customers.
Just as the most sales come from 20 percent of your customers, the most intense pain comes from 20 percent of your customers. These are the customers who have your help desk on speed dial, are people you know by name and are also people you sometimes wish you didn’t even have as customers.
These few customers are responsible for 80 percent of the time and attention of your customer service personnel. Keep this in mind when you’re developing strategies for assisting your help desk personnel.
In closing, here are two points:
- The Pareto Principle is not a law. It can be applied sometimes in some circumstances, but not all the time.
- The Pareto principle can be extremely powerful. And that means the same kind of power that comes from finally realizing that your data is telling you a story and that it is actionable.
So, apply the Pareto Principle with caution. But do apply it! It can make an enormous positive impact on your business.