You should have probably heard about Pareto’s principle. Do you understand what it’s all about? This principle is used under different names, for instance, the law of the vital few. Perhaps, the most recognizable is "80-20-rule" and “Pareto principle". Despite its simplicity the idea is far-reaching: 80% of effect is produced from 20% of its cause.
Exactly in marketing and sales the Pareto principle can be applied really vividly, hopefully, opening eyes to some people in the business who were going to get real busy.
Italian economist Vilfredo Pareto(1848-1923), in his research of 1906 came to a conclusion that 80% of the land in Italy was owned by the wealthy 20% of the population, which is namely 20% of all the people living in Italy by that time. Pareto was astonished by his findings; what appeared to be an even bigger surprise was that, after doing more research, he found out that the situation was similar in other countries.
The Pareto Principle in Marketing
Marketing strategist Perry Marshall has taken Pareto to its logical extreme. In his awesome book 80/20 Sales and Marketing
he calls it the “explosive potential of 80/20”, and discusses how deep, how potent 80/20 really is.
Marshall has also approached the Pareto principle closer and saw its exponential nature: Let’s say that 20% of your customers are responsible for 80% of your sales. Now, let’s take those 20% and analyze what we’ve got. What you’ll discover is that 20% of that group (yes, 20 percent of 20 percent) is responsible for 80% of those sales. And then, if you take that 20 %, 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 big enough." Marshall argues that it is infinite.
It leaves to see whether it is infinite or not. Whatsoever, Pareto principle provides some high-performance applications marketing. Here are a few things that you would love to know about:
80% of your revenues come from 20% of your customers
This is the most common observation of the Pareto principle. Good news is it’s easy to see if it is workable for your business or not. If you find that the biggest chunk of your revenues comes from around 20% of your buyers, then make sure you’re working hard to retain those customers and you are treating them nice.