Recently Prof Byron Sharp, an eminent marketing thinker 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 the 80/20 rule.

Prof Sharp is a pioneer in evidence-based marketing and he challenged hundreds of American marketing books, researchers, and universities for spreading wrong assumptions and old knowledge.

Pareto Principle, or widely known as the 80/20 rule, is a commonly used theory in marketing and business world. This is mostly applied now in customer relationship management (CRM) practices while a portion of marketers thinks of making profitable decisions based on customer database.

Also, important decisions are made using that database that executives manage to keep utilising the advantage we have now due to the usage of technology and digitalisation. There is nothing wrong with this other than the 'obsolescence' of the Pareto Principle itself in the marketing world.

What is Pareto Law?

Joseph M Juran, a quality management consultant, suggested the 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 the Pareto Principle but ironically did not remember Juran much on this topic.

Vilfredo Pareto's studies revealed that about 80 per cent of the land in Italy was owned by the 20 per cent of the population, according to Juran.com. Juran also realised that the same 80/20 rule could also be used in the contexts of the distribution of income, wealth among the population and in quality management issues. Gradually over the last century, it has become an axiom in the business world that 80 per cent of sales come from 20 per cent clients.

In the simplest form, it can be said that 20 per cent input produces 80 per cent of the output. In the 1990s, this was popularised by the UNDP's Human Development Report where inequality was convincingly displayed. This showed that the distribution of global income is highly uneven or skewed, with the richest 20 per cent of the world's population controlling 82.7 per cent of the world's income. In the 2010s, this inequality has aggravated further.

The 80/20 rule has examples and implications in economics, mathematics, sports, team management and R&D trials. At the same time, some people also argue that this rule is a precept, not a hard-and-fast mathematical law.

What is there for marketers in the 80/20 rule?

Prof Sharp and Prof Jenni Romaniuk revealed in their study in 2007 that in marketing, the 80/20 rule 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, they confirmed in 2019 that a brand's heaviest 20 per cent buyers generally contribute not much more than half of its sales and these same buyers will contribute less in the following period. Indeed, even for stable brands, half of last year's heavy buyers will not even qualify to be in the top 20 per cent, while the people who were light or non-brand buyers last year will contribute more to sales this year than they did last year. Prof Sharp and his team are the first group of researchers who challenged the well-known axiom of the 80/20 rule. Then the successive studies found results around 60/20, 53/20 or 50/20, and 65/20 rule. Erik Brynjolfsson, Yu (Jeffrey) Hu, and Duncan Simester in 2011 interestingly said "Goodbye Pareto Principle!"

In the last 12 years, the Ehrenberg-Bass Institute for Marketing Science carried out researches along with several academics and they finally concluded that "It's wrong to talk about an 80/20 law in marketing."

Another researcher Prof Gerald Goodhardt unveiled a 20:30:50 law which is closer to real-life findings. This law states that the 20 per cent heaviest buyers account for 50 per cent of purchases, the 50 per cent lightest buyers account for 20 per cent of purchases, and so the middle 30 per cent of buyers account for 30 per cent of purchases. In short, 20:30:50 buyers accounting for 50:30:20 purchases.

Different thoughts from other industries and countries, including Bangladesh

In the banking industry in Bangladesh, I found the 80/20 rule works. I researched while designing priority banking services at Prime Bank in 2013.

I worked with the IT department's executives who manage the core banking software and we pulled out the individual customer's data from important branches such as Gulshan, Banani, Uttara, Motijheel and Dhanmondi. We found that the top 20 per cent account-holders keep the cash, deposits or FDR worth of 80 per cent 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. In return, the top-tier customers enjoy five-star facilities within or outside bank premises.

Then we looked at countrywide data where it is found that the top 25 per cent of the bank account-holders account for 80 per cent of the cash flow.

I can recall a Nielsen RMS team came to us with a proposition to sell one of their products. The product deals with retailers' database and transaction details (universe) where they told us that Nielsen can give us the transactions profile (but not the names) of the top 20 per cent retailers who usually dictate 80 per cent sales in the fast-moving consumer goods (FMCG) sector. However, we did not ponder that proposal further as there was no commitment of such assumptions and claims except their priming with the Pareto Law as theory only.

Recently, a report outlined that Facebook's top 100 advertisers contributing only 16 per cent of their revenue. 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 contract manufacturer that makes electronic products for major American, Canadian, Chinese, Finnish, and Japanese companies. Products manufactured by Foxconn include BlackBerry, Kindle, Nintendo DS, iPad, iPhone, iPod, Nokia devices, Xioami devices, Wii U, Xbox 360, Xbox One, PlayStation 3 and PlayStation 4.

The top 20 per cent customers of Foxconn must deliver 80 per cent of its revenue. Another example is Intel, which supplies microprocessors to computer system manufacturers such as Apple, Lenovo, HP and Dell. Here again, I assume, the top 20 per cent customers of Intel must provide 80 per cent of its revenue.

Recently, I was talking to a seasoned marketer in Bangladesh. His background is in cigarette, food and beverage industries and is now working at the CXO level. He confirmed that he noticed 70/30 sales rule in the FMCG sector in recent years. I believe this rule works in the business-to-business segment more than the business-to-customer segment.

In the consumer package goods market in Bangladesh, we did not find similar conclusions. But I can say the 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 consist of heavy, medium and 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 per cent of buyers. So, similar to Prof Sharp, I also conclude: "It's reasonable to talk of a Pareto Law but wrong to refer to it as 80/20."

I also argue that when most of the scholars and practitioners used this as a principle, Prof Sharp termed it as a law. However, specifically, in the B2B marketing, banking and in some other businesses, this 80/20 rule may still have a value to the people who work smart and are hypothesis-led. 

When I showed the draft of this write-up to John Bows, R&D director of PepsiCo, UK, he said: "I personally think it is often possible to use the 80/20 principle in R&D trials – I can get to 80 per cent of the physics with 20 per cent 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 the 80/20 rule in marketing or product development are pervasive. However, in agreement with Prof Sharp, I also can ascertain that in consumer brands and fast-moving consumer-packaged goods this may be true that the "80/20 rule is over" and it is pragmatic to accept marketing's Pareto Law as 60/20.

The author is deputy general manager for marketing at Ispahani Tea Ltd. He can be reached at [email protected].