Ever heard of the Pareto Principle? It has its own entry on Wikipedia, so I expect you to know what it is (just like how I expect you to know all of Wikipedia’s other 5.5 million articles).
If you aren’t familiar with it, it goes by many names and applies to several industries, but hey, we’re an ecommerce blog! ‘Round these parts we know the Pareto Principle as the 80/20 Rule, which states 80% of profits come from 20% of customers. (The guy who came up with the theory, Vilfredo Pareto, noted in 1906 that 80% of the land in Italy was owned by 20% of the population, after observing a bunch of pea pods, so who knows how we wound up here.)
But there’s a reason why Pareto’s principle has prevailed a century on. I mean, other than the fact that it’s surprisingly accurate, it’s also easy to digest and to apply to different concepts. So what makes it so great when you’re running an online business?
Keep Your Eyes on the Prize
It’s important to know there’s a difference between something being true and accurate: a true fact is unchanging, while accuracy has a little wiggle room. So it’s important to know that when marketers say 80% of any store’s profit comes from 20% of all their customers, it’s not always going to be exactly that, but something similar.
I like this quote from a 2013 article from Entrepreneur: “We’re all tempted to waste our time trying to please all of our customers instead of the most lucrative ones.” And considering some 50% of all ecommerce customers are returning customers, it seems that this application of the Pareto Principle calls for a merchant to see that 20% of customers as a good thing. They’re comprised mostly of returning customers, pushing that percentage of profit closer and closer to 100%—but of course, there are the one hit wonders who make a purchase and never come back, driving that statistic closer to 80%.
Don’t Fall In Love
The 80/20 Rule doesn’t exist to be something you need to obsess over. But it’s a great guideline to help you perceive the magical inner workings of your business. If you’ve been reading this blog for a while now, you’ve become familiar with some of the tips and tricks we keep throwing in your face, and hey, you can really pick and choose the advice where you see fit.
So then I present to you a list of other ways the 80/20 Rule works for ecommerce:
- 80% of your visitors come from 20% of your keywords (or hashtags!)
- 80% of your sales come from 20% of your advertising
- 80% of customer complaints come from 20% of customers
- 80% of product sales from 20% of products
- 80% of pea plants in a garden produce 20% of all peas (Oh, hmm… How did this one get in here???)
As you can see, there is no one way to apply the 80/20 Rule, and many of them can serve to inspire and guide you—and your pea plants, if you have any.