The Pareto Principle says that 80% of your sales come from 20% of your customers. Looked at from the other side, it also states that 80% of your sales come from 20% of your products. It’s a theory based on human activity, not only shopping. So Pareto would say 80% of the time you wear 20% of the clothes in your wardrobe.
This 80/20 rule doesn’t stop there because, if you analyse the 20% that are your best customers, best selling products or favourite clothes, you’ll find they break down into 20% being responsible for 80%. And if you analyse that 20%… well, you get the idea.
I admit you may not have enough clothes to get beyond the first 80/20 analysis. Unless you’re Victoria Beckham, you’ll end up with a t-shirt and a pair of jeans. However businesses have thousands of products and customers. So how should we apply the Pareto Principle? We can’t just dump the 80% of poorer sellers and then analyse the remaining 20% and cull 80% of them. We’d end up with 40 products and a lot of empty shelves.
Customers like a choice between colours, prices, styles, quality or whatever, even if they end up choosing the popular products. It’s more a matter of making sure you have plenty of the things people buy and low stock of what is sometimes called the long tail.
It’s as if you were to throw out all your clothes barring the 20% you wear most of the time. The red trousers can go without a second thought but one day you’re bound to need the suit you only wear for weddings or that old sweater that’s just right for gardening. That’s known as Sod’s Law, not as scientific as the Pareto Principle but true nevertheless.
I also don’t recommend a shop telling the 80% of its customers that only bring in 20% of sales to push off because it has more important people to serve, although I have been in some upmarket boutiques that seem to adopt that approach. Where the Pareto Principle helps businesses is in telling us that it is worth identifying your key 20% of customers and products and then concentrating marketing and financial resources on them.
As for your wardrobe, clear out the clothes you never wear but don’t get rid of them. Put them in a box in the loft. If you haven’t needed them a year later, then’s the time to give them to your favourite charity shop. And when you look around at that shop’s stock, you’ll know that’s the 80% that only accounted for 20% of other shops’ sales.
This blog was written by Paul Lewis, owner of the marketing consultancy The Lewis Experience and online retailer Your Life Your Style, both based at Hampshire Workspace, and former Head of Marketing and Operations at The Mayflower Theatre. You can connect with him on Google+ and LinkedIn.