Have you heard about Pareto’s 80-20 rule or Pareto’s Principle in marketing? What is Pareto’s principle? Before getting to the definition of Pareto’s principle and how it can benefit you in marketing, answer these questions first. How many mobile apps do you have on your mobile phone? How many of them do you use regularly? Even if you have 50 or 60 apps on your phone, you use only a few regularly. How many dresses or shoes do you have in your wardrobe? How many do you use? There will be a few dresses or shoes that you use often and others that sit in your wardrobe and are rarely taken out. Similarly, if you own a shop, you might have noticed around 20 percent of your customers bring in 80 percent of the revenue. This is called Pareto’s principle and is universally applicable to most situations. Vilfredo Pareto, the famous economist and philosopher is the one who formulated this principle. He discovered the Pareto Principle by observing the pea plants in his garden. He found that 80 percent of the peas come from 20 percent of the pea plants in the garden. On further investigation, he found out that 80 percent wealth and land in Italy was in the hands of 20 percent of people. This inequality in output when compared to input is what makes Pareto’s principle interesting. There are many examples of Pareto’s principle around us. Understanding Pareto’s principle and using it effectively can help you get higher ROI by making the right choices and investments. Pareto’s Principle has been used in marketing for years and by learning more about it, you can channel your resources to the growth of your business.
Pareto’s Principle – Definition
Pareto’s principle states that 80 percent of the results come from 20 percent of the causes. This can be elaborated as 80 percent of the output comes from 20 percent of the input or 20 percent of your efforts lead to 80 percent of the results.
When this is translated to marketing, this can be applicable to every stage. For example, 80 percent of your business’s profit comes from 20 percent of your customers. 80 percent of the sales that you make is 20 percent of your products or sales team. This is also applicable to advertisement. 80 percent of your leads come from 20 percent of the advertisements that you give. When it comes to customer relationship management, 80 percent of your complaints might also be from 20 percent of your customers. When you take everything that you do for the growth of your business and analyze it using the 80-20 rule, you get to know what pays off and which efforts that you made are actually contributing to the growth of your business.
Pareto’s 80/20 Principle in Marketing
What we can understand from Pareto’s principle is that multitasking is not really productive when it comes to marketing or business. Focusing on the vital 20 percent that contributes to growth of your business is better than aimlessly spending a lot on multiple Marketing strategies. Identifying this 20 percent is the first step. For example, you can find the 20 percent of the customers that are bringing in 80 percent of your revenue and focus on retaining them using techniques like loyalty marketing rather than marketing to a new audience that may or may not convert. This does not mean that you should neglect your 80 percent of the other customers that bring only 20 percent of the revenue. You have to treat your customers the same whether they are big or small. But, you can focus on retaining your existing customers who contribute more to growth and expand your business through them and gradually make your smaller customers contribute more to your business’s growth.
Digital Marketing and Pareto’s Principle
Marketing has evolved over time and with the advent of the internet and online platforms, every business is now able to market to a target audience online. There are various digital marketing strategies that are used by businesses to increase online visibility, find their audience, to get more conversions and build a trusted customer base. Let us see how Pareto’s Principle can be used to leverage your Digital Marketing Strategies. If you have done SEO, you might have noticed that 20 percent of the keywords contribute to 80 percent of the search visits. If you own an eCommerce store, 80 percent of sales online are for 20 percent of your products. In content marketing, 80 percent of the leads you get are generated from 20 percent of your content. This is also true for social shares in the case of Social Media Marketing. Now that we have understood that finding the vital 20 percent is important to develop a good marketing strategy, let us look at a few examples of techniques which help you to analyze and apply Pareto’s principle to your marketing tactics.
- Ishikawa diagrams
Ishikawa diagrams or fishbone diagrams are used to identify potential causes and factors causing overall product design and quality. These allow you to use brainstorming tools to analyze multiple root causes of an event.
- Long Tail Distribution
Long Tail distributions represent a period of time in which you make a profit by selling less common products to some people with little advertising and expenditure.
- Conversion Rate
Conversion rate optimization is optimizing the number of conversions on a website using various strategies. There are different metrics that aid in CRO. You can calculate conversion rate based on website traffic and leads generated.
- Gap Analysis
Gap analysis helps you to compare actual performance with desired performance. There are different templates that help you to do gap analysis for various factors like customer intent and visualize it.
Pareto’s Principle can help you identify the points in which you should focus to speed up your online growth. Microsoft has used this principle to prioritize fixing their bugs after finding out that 20 percent of the bugs cause 80 percent of the issues. There are many analytics tools that are available to find patterns in the effect of digital marketing strategies to identify the most contributing tactics to your online growth. You can prioritize effective digital marketing tactics based on the analytics data and focus on it.