The 80/20 rule was a principle formulated by Italian economist Vilfredo Pareto. In his 1896 paper Cours d’Économie Politique, the economist highlighted that 80% of the land in Italy was controlled by 20% of the population. This led to the deduction of the rule that came to be known as the 80/20 rule. The 80/20 rule is also known as the Pareto principle.
While the connection between the Pareto Principle of wealth distribution and the marketing world may not be apparent, the 80/20 principle is one of the most important rules in marketing and business. It offers a great perspective that can be used to analyze various aspects of business, marketing, and sales.
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The 80/20 rule broken down
Even though the 80-20 rule was originally an observation of the distribution of wealth among the population of 19th century Italy, the principle is applicable in many other disciplines such as sports, business, and healthcare. The rule generally dictates that there is an 80/20 correlation in causes and effects. Simply put, 20% of effort results in 80% of the results.
The Pareto Principle applies perfectly in the business world. Some of the variations of Pareto’s 80/20 rule in business include;
- 80% of sales come from 20% of the salesforce.
- 80% of conversions come from 20% of advertising.
- 80% of profits come from 20% of products.
- 80% of purchases come from 20% of the clients/consumers.
- 80% of search results come from 20% of keywords.
The 80-20 rule is also related to the long-tail distribution phenomenon. In long-tail distribution, a huge percentage of occurrences (80%) occur far from the head or the central part of the distribution plot. This results in a plot with a short head and a long tail, hence the name.
From the plot above, only 20% of the products account for 80% of the sales.
Applying the 80/20 rule in marketing and sales
Pareto’s 80-20 principle can be used to increase productivity and profits in your business through three simple steps;
Identifying the 20%
The most important step in adapting the 80/20 rule for your business is by identifying the areas that account for most of your sales or profits. As a business owner or manager treating every product, employee, and customer as equal can be tempting. This, however, almost always undermines the 20% section of your organization that accounts for most of the profits. Adopting a multi-faceted approach in identifying the critical 20% in your organization can be critical in increasing productivity. Areas where the Pareto Principle can be applied in an organization include;
- Products – Not all products sell the same. Most times, a few of the products account for a large majority of the sales. You should perform a sales analysis in order to identify the 20% of products that sell most.
- Customers – All customers are welcome business, but some customers bring more to the organization or business than others. Identifying these customers can help you to better focus on them and offer incentives to increase their profitability to the business.
- Sales reps – Like all other aspects, your sales team consists of a fraction that brings in more business than the rest of the sales team combined.
- Countries/region/demographics – Identifying countries, regions or the demographic characteristics of your most profitable market can help you focus more on these markets and make marketing more efficient and effective.
- Customer dissatisfaction – By the same rule, 80% of customer dissatisfaction complaints originate from 20% of the issues affecting them. Identifying these can help improve client satisfaction and service delivery.
Capitalizing on the 20%
After identifying the most profitable or problematic aspects of your marketing and sales structure, you can employ steps to better increase profitability. This can be done by reproducing the aspects you found most profitable and improving on them. Some of the ways you can do this are;
- Incentives – Your best clients should be treated better than the other clients who bring only 20% of your profits. Focus on these by offering them incentives that ensure they feel appreciated and establish deeper loyalty.
- Targeted marketing – After establishing the demographic, country, or region that accounts for most of your profits, you can start targeted advertising intended to reach more consumers in this market. This helps your organization reap more profits from a market section that has already proven to be profitable.
- Sales and marketing yardstick – Once you identify the 20% of your marketing and sales team that accounts for most sales, you can use them as a yardstick for better sales. Identify the behaviors and practices that make their sales much more impressive and encourage these practices in other members of the sales team. You can also identify positive traits on these salespersons that make them more effective and look for them when onboarding other members of the sales team.
- Manage your budget – You should also tailor your budget to focus on areas that have been proven to produce desirable results through the 80/20 rule. Don’t spend too much of your marketing budget trying to harness regions with little or no returns.
- Rewarding most productive employees – You should also find a way to reward the 20% of the employee workforce that is most productive in order to foster competition and improve motivation in the workplace.
- Solving customer issues – Customer dissatisfaction negatively affects sales and is dangerous to your organization’s reputation. By the Pareto principle, solving 20% of the problems that cause 80% of the customer complaints would significantly improve customer satisfaction with minimal effort and resources.
Reducing effort on the non-profitable 80%
Reducing the effort and resources you channel into the less profitable 80% of the organization can help save valuable resources that could be put into use elsewhere. However, cutting on expenses should be done in an informed manner, choosing where it is wise to cut down on the 80% and where it is not.
Cutting on aspects such as advertising in markets that don’t bring substantial returns is a wise move. On the other hand, cutting down on employee profitability by firing employees who are not profitable could increase the turnover rate in your organization and reduce employee happiness, which could lead to a counter-effective tumble in productivity.