By S M Didarul Hasan, DGM, Marketing, Ispahani Tea Ltd.
Recently Professor Byron Sharp, an eminent marketing think-tank from the Ehrenberg-Bass Institute for Marketing Science in Australia, confirmed that Marketing’s Pareto Law is 60/20. This is an interesting argument whereas the business world and marketing fraternity is deep-rooted with the fact and fallacy of 80/20 rule. Professor Byron is a pioneer in evidence-based marketing, and he is also one of the most talked about marketing thinkers now who consecutively challenged hundreds of American marketing books, researchers, and universities for spreading wrong assumptions and old knowledge. I read his books and a few articles which intrigued my attention in 2020.
Pareto Principle, or widely known as 80/20 rule, is a commonly used theory in the marketing and business world. This is mostly applied now in customer relationship management (CRM) practices while a portion of marketers think of making profitable decisions based on customer database. This kind of strategy is likely to be applied to mortgage marketing amongst other industries too. Also, important decisions are made using that database that executives manage to keep utilizing the advantage we have now due to usage of technology and digitalization. There is nothing wrong with this other than the ‘obsolescence’ of the pareto principle itself in this realm. Successive research by the Ehrenberg-Bass Institute for Marketing Science in Australia and many researchers around the world have found that the Pareto Law is NOT exact in the marketing world. To the readers, I’d like to note that the Ehrenberg-Bass Institute for Marketing Science is the largest marketing think-tank and No. 1 in the world for brand management research which aims to uncover law-like patterns and relationships and build empirically grounded theory to explain and predict buyer behavior and brand performance. The institute’s corporate sponsors include Coca-Cola, Unilever, P&G, Nestle, Carlsberg, ESPN, Diageo, Facebook, LinkedIn, Google to name a few.
WHAT IS PARETO LAW?
Dr. Joseph M. Juran, a quality management consultant, suggested this Pareto principle and named it after Italian economist Vilfredo Pareto who noted the 80/20 connection in 1896. Interestingly, scholars, practitioners and people across the world accepted this Pareto principle but ironically did not remember Dr. Juran much on this topic. Vilfredo Pareto studies revealed that “approximately 80% of the land in Italy was owned by the 20% of the population” according to Juran.com. Juran also realized that the same 80/20 rule could also be used in the contexts of income and wealth distribution among populations and in quality management issues. Gradually over the last century, it has become an axiom in the business world that “80% sales come from the 20% clients”. In the simplest form it can be said that 20% input produces 80% of the result. In the 1990s, this was popularized by UNDP Human Development Report where inequality that prevails in the world was convincingly displayed. This showed that the distribution of global income is highly uneven or skewed, with the richest 20% of the world’s population controlling the 82.7% of the world’s income. In the last decade, this inequality has aggravated further. However, 80/20 rule has examples and implications in economics, mathematics, sports, team management, R&D trials to name a few. At the same time, some people also argue that this rule is precept, and not a hard-and-fast mathematical law.
WHAT IS THERE FOR MARKETERS IN 80/20 RULE?
Professor Byron Sharp and Professor Jenni Romaniuk revealed in their study in 2007 that in marketing, 80/20 rule or Pareto Law does not work like as it is conventionally thought of. In their book ‘How Brands Grow (2010)’, they articulated that “the ’80/20 law’ is a misleading simplification”. They also argued that it may work like 60/20 but not as extreme as 80/20. After 12 years of their first claim, recently in 2019, they confirmed that “A brand’s heaviest 20% of buyers generally contribute not much more than half of a brand’s sales, and these same buyers will contribute less in the following time period. Indeed, even for stable brands half of last year’s heavy buyers will then not even qualify to be in the top 20%, while the people who were light or non-brand buyers last year will contribute more to sales this year than they did last year.”
Professor Byron and his team is the first group of researchers who challenged the well-known axiom. Then the successive studies by Brynjolfsson, Hu, and Simester in 2011 in study on women’s clothing retailing, Romaniuk and Sharp study in 2016 on groceries categories in developing markets like us (India, Malaysia, Kenya, Mexico), and Steenkamp study in 2017 and a few others well-designed studies found results around 60/20 or 53/20 or 50/20, and 65/20 rule. Thus, Brynjolfsson, Hu, and Simester in 2011 interestingly said “Goodbye Pareto Principle!”. In the Last 12 years, the Ehrenberg-Bass Institute for Marketing Science researched through corporate sponsors like Coca-Cola and others, along with several academics and they finally concluded that “It’s wrong to talk about an 80/20 law in marketing.”
Another researcher Professor Gerald Goodhardt unveiled a 20:30:50 law which is closer to real-life findings. This law states that “the 20% heaviest buyers account for 50% of purchases (proved true in Sharp and Romaniuk, 2007), the 50% lightest buyers account for 20% of purchases, and so the middle 30% of buyers account for 30% of purchases. In short, 20:30:50 buyers accounting for 50:30:20 purchases.” To know more evidence, interested readers can avail Professor Byron Sharp’s 2010 book ‘How Brands Grow’ and check out Chapter 4.
THE LONG TAIL: FURTHER TO 80/20 RULE
Professor Steenkamp of University of North Carolina checked this trend further in 2017 using Europanel data and argued that for almost any brand, the (large) majority of category buyers are the light buyers. However, he argued marketing’s Pareto law as 50/20. He calculated the Pareto share for many brands in food, beverages, household care, personal care, femcare, baby care and pet food found no evidence whatsoever for the 80/20 rule. He also concluded that using target marketing strategy of focusing on heavy users, marketers are ignoring other 50% of the market to grow. While there is a contrasting school of thought who as well believed in focusing on light users is not investment friendly as it demands more resources to deploy. However, there are fascinating theories available around this debate, one of those is the Long Tail, which is coined by Chris Andersen, the editor of WIRED UK. This long-tail marketing refers to concentrating on the less regular items and developing business sales model based upon maneuvering with the smaller or irregular SKUs in the ‘Long Tail’. While regular marketing strategies focuses on specific products/brands and targets ‘golden households’, the long-tail marketing focuses on more inventory management than promotion. Thus, this long-tail marketing is quite popular in online commerce domain surpassing the brick-and-mortar retails. By providing the greater variety of inventory (extending the long tail) businesses hope to reach more customers and generate more total sales. I think the light users usually graduate towards bigger SKUs and grow loyalty slowly.
So, inviting more people to buy or try is crucial. It opens wider opportunity of people to taste or try. Andersen says that the industry has a poor sense of what people want. That is how long-tail is effective. At the same time, if we want to deploy resources that should give more sales that is how top 20/30 percent of customers are crucial as well. However, every business is dynamic, and challenges are somehow different. So, the 60/20, 70/30 rule may be different. But it helps make strategic clarity obvious. I think both ways have got merits. The important thing is to have a minimum level of awareness regarding how things can be utilized for the better. Ignorance may lead us to biased rationality or irrationality.
DIFFERENT THOUGHTS FROM OTHER INDUSTRIES AND COUNTRIES INCLUDES BANGLADESH
I can recall from the banking industry in Bangladesh that I found 80/20 rule actually works. I did the research myself while designing priority banking services at the Prime Bank Limited back in 2013. I worked with IT department’s executives who manage the core banking software and we pulled out the individual customers data from important branches like Gulshan, Banani, Uttara, Motijheel, Dhanmondi where we have clearly found that the top 20% bank account-holders actually keep the cash, deposits or FDR worth of 80% fund of the branch. Thus, they get priority banking services. The high net-worth and profitable customers are pampered to keep these funds with the bank so that banks can do business with the idle money while top-tier customers enjoy five-star restaurant-like facilities within or without bank premises. Then we had looked at countrywide data too where it is found that top 25% of the bank accountholders account for 80% of the cashflow. But when I moved to FMCG sector, now I can recall a market-research firm’s RMS team came to us with a proposition to sell one of their products which deals with retailers’ database and transaction details (universe) where they told us that they can give us the transactions profile (but not the names) of top 20% retailers who usually dictate 80% sales of the FMCG sector. However, we did not ponder that proposal further as there was no commitment of such assumptions and claims except their priming with this Pareto Law as theory only.
Last week a report outlined that Facebook’s top 100 advertisers contributing only 16% of their revenue. Google also makes most of its money off small advertisers. However, three million businesses advertise on Facebook. Some people argued that, for private level products, the 80/20 rule works. Just think of Foxconn, a Taiwanese multinational electronics contract manufacturer, which manufactures electronic products for major American, Canadian, Chinese, Finnish, and Japanese companies. Products manufactured by Foxconn include the BlackBerry, Kindle, Nintendo DS, iPad, iPhone, iPod, Nokia devices, Xioami devices, Wii U, Xbox 360, Xbox One, PlayStation 3, PlayStation 4, etc. The top 20% customers of Foxconn must deliver 80% of its revenue. Additionally, there is a practice within almost all businesses that they hardly rely on single source suppliers. Luxshare, a Chinese-based electronics manufacturer, is a similar second assembler used by Apple other than Foxconn which is amssing business and growing faster, reported in the Reuters in October 2020. Luxshare now gets 58 percent of its revenue from from Apple, according to Morningstar Research. So, it can be assumed that 80% of Luxshare’s revenue is coming from a top few business. Again, to me, Intel is a similar example which supplies microprocessors for computer system manufacturers such as Apple, Lenovo, HP and Dell. Here again, I assume, the top 20% customers of Intel must provide 80% of its revenue. Again an example from Bangladesh, I was talking to a seasoned marketer in Bangladesh last week whose background is cigarette, food and beverage industries, now working in the CXO level, confirmed that he noticed 70/30 sales rule in FMCG sector in recent years.
While I personally believe this rule works with B2B businesses more than B2C businesses. In the consumer package goods market in Bangladesh, we did not find some similar conclusions. But I can tell this 80/20 rule does not apply to consumer products or brands. In one hand, millions of small retailers comprise our sales; on the other hand, hundreds of millions of consumers encompass the total sales which consists heavy, medium, light buyers. Researchers rightly pointed out that it is reasonable to expect that almost half of the brand’s sales will always come from the very lightest 80% of buyers. So, similar to Professor Byron Sharp, I also conclude like, “It’s reasonable to talk of a Pareto Law but wrong to refer to it as 80/20.” However, I disagree with Professor Sharp on his conclusions on marketing. I also argue that when most of the scholars and practitioners used this as a principle, Professor Byron Sharp termed it as a Law.
However, specifically, in B2B marketing, banking and in some other businesses, this 80/20 rule may still have a value to the people who work smart and lead by hypotheses. On this topic, I was corresponding over email to one of my mentors, who is also the R&D Director of PepsiCo, United Kingdom, reading my draft of this write-up he said, “It is often possible to use the 80/20 principle in R&D trials – I can get to 80% of the physics with 20% of the design of experiment effort, if I have some reasonable starting knowledge of the food system I’m investigating.” This further shows the implications of 80/20 rule in marketing or product development is pervasive. However, agreeing to Professor Byron Sharp I also can ascertain that in consumer brands and fast moving consumer-packaged goods this may be true that “80/20 rule is over” and it is pragmatic to accept marketing’s Pareto Law as 60/20.
S M Didarul Hasan is the Deputy General Manager, Marketing at Ispahani Tea Limited; and an MBA from University of Exeter, United Kingdom; he can be reached at [email protected].
