Why businesses should be serious about Parento’s 80/20 principle?

The 80/20 principle was derived from the way wealth was distributed in Italy. Pareto the author of this principle observed that 80% of the country’s wealth was in the hand of 20% of the population. Subsequently this 80/20 split was noticed in all walks of life. For example, 20% of the inputs generated 80% of the output; 20% of the workers contributed to 80% of the production. 20% of the functions provided 80% of usage. Parento’s principle offers two suggestions, one is that any desired outcome can be produced by focusing on a small number of key entities and the second is that the key entities must be prioritised to receive most of the resources.

Parento’s principle just as well applies in business, that is, 20% of customers provide 80% of the business. The challenge for managers is to identify that core group of customers that contribute to 80% of the business and service them to their full satisfaction. Once this core group is identified, the principles of relationship marketing can be applied to develop and maintain ongoing relationship, which is the essence of Service Dominant Logic (SD Logic), a revisited concept of marketing. Furthermore, generating new business through retaining customers is less costly than acquiring new ones (click here for a second opinion), which is a further incentive for employing relationship marketing.

Most businesses tend to focus much of their resource on reaching the widest possible market. This is done for two possible reasons, one to attract customers (new & old) and two to derive the full value of money spent on advertisement. But if customers who have the potential to yield 80% of the revenue are in the business’ own database then the resource spent to reach the widest possible market is incorrectly targeted and could end up not yield the intended ROI.

The essence of relationship marketing is selling deep to existing customers. This is achieved by 1) having one-on-one interactions with customers, 2) creating marketing touch points to deliver additional value and 3) maintaining a high level of satisfaction. In addition to other infrastructure, businesses would need to set up an interactive website and access to a platform for conducting surveys. One-on-one interaction requires fronting up in person and the website and surveys to be used for generating data to inform the creation of touch-points specific to the business and customers.