The Pareto principle (also known as the 80–20 rule) states that, roughly 80% of the effects come from 20% of the causes.
I think of it as “Cause & Effect” meets impact.
- 20% of Customers drive 80% of your sales
- 20% of your employees drive 80% of your productivty/output
- 20% of your time drives 80% of your productivity
There are not many areas this law will NOT conform too. It may be one third driving two thirds, but the relationship holds: Small #’s drive the bulk of results.
The key behind this principle is understanding the highly productive 20% driving the majority of the benefit. Find more of that. Protect that group, nourish it, put your effort there. Understand the remaining 80% and if possible minimize your effort against it.
Real World Application: CPG
80/20 can be demonstrated visually. Take a typical category in your local grocery store, lets say Cereal. Pareto’s law says that 80% of the category revenue will be driven by 20% of the items. How do you visually demonstrate this? Break out a Marketer’s right hand (EXCEL):
- Calculate the % share of each item.
- Rank them high to low
- Calculate the “cumulative” share of each additional item. Example, if the #1 item represents 5% of category sales, #2 = 4%, the cumulative share of both of those items =9% of the category sales. Add up the cumulative shares of all the items
- Graph the cumulative contribution of every item.
- Manage accordingly: If your valuable, sell it. If your vulnerable, work to change it, or understand why it shouldn’t matter (loyalty, uniqueness, etc)
Graphically, the results look like this, where the first 400 items (<20% of the total 1,300 items) drive nearly 90% of the category sales.
This law holds for nearly every category. And nearly every time I’ve seen it in action, eyebrows raise. It should be of no surprise, but think about it: In this category, 900 items drive 5% of the sales, while 300 items drive 95%!
Said another way, how would you like to be part of the 900 items doing little for the Buyer’s contribution to sales, while hundreds of competitors fight for this same space? Power (the “Missed P” of Marketing) Matters. Knowing it is step #1.
Note: This type of analysis is so critical, the “competency” is a foundation for Career success in a Marketing CPG career.