We’ve all heard it. The Pareto Principle, better known as the ’80/20 rule,’ has long been one of the business world’s most obvious and undisputed truths.
It’s based on the observations of Italian economist Vilfredo Pareto from 1896.
For example, he noted that 80% of the peas in his garden came from 20% of the pea pods (incidentally, no one has yet been able to replicate the results of Pareto’s pea plant experiment).
I have heard the 80/20 rule used in countless contexts, but the most common is: ‘20% of customers account for 80% of revenue.’
I’ve said it myself. Many times. ‘Focus on the Vital Few,’ I used to say. And it sounds smart, doesn’t it?
But recently, I came across something that made me stop. What if this widely accepted rule… isn’t actually true?
When 80/20 turns out to be 50/20 instead
I came across a study by Sharp, Romanuk & Graham (2020) from the world’s largest centre for marketing research: the Ehrenberg-Bass Institute.
In this study, they thoroughly investigated how the 80/20 principle functions in reality within brand marketing and customer behaviour.
The results? Mildly put, transformative.
Their conclusion: The top 20% most revenue-generating customers account, on average, not for 80% of revenue, but only for just over half.
In some categories as little as 44% (hair conditioner), and in others 68% (dog food).
So, it’s not 80/20. It’s closer to 50/20.
That is, 50% of the revenue comes from 20% of the customers.
👉Two takeaways for me
1️⃣ The broad customer base is likely more important than we thought. If 80% of the revenue doesn’t come from the most loyal 20%, then the rest of the customer base is far more valuable than we previously assumed.
2️⃣ Loyalty is not static. Customers come and go, change brands, life situations, and needs. If we only focus on our current most valuable 20%, we risk missing the next wave of buyers.
💭 What are your thoughts? Have you found that the 80/20 rule doesn’t quite hold up in your industry, or does it still work for you? Feel free to share your thoughts in the comments 👇
Here you can read more about how to think differently regarding sales!
