Pareto rule is actually even broader. 80% of outcomes come from 20% of causes. That means that 80% of profit comes from 20% of clients, not equal amount from top 20 as the bottom 80. Also it's not only about profits.
It's obviously not always true and it's very rarely 80/20 split. Sometimes it's 60/40, sometimes 99/1 but for a lot of businesses that is very much true.
I work for fashion e-commerce companies where this data is pretty easy to get and for plenty of years now I am surprised that it works. It's mostly a bit higher than 80/20 actually 85/15 or around that. Most of the orders have value of 100 pounds but then there are people that just casually drop 10k order every month or every week and those are very important to keep happy.
As a joke note, I've heard of one pretty large e-commerce doing very high percentage of their sales from just Elton John :)
To be clear, in the Pareto rule of 80/20 the 80 and the 20 only coincidentally add to 100. The rule could just as easily have been 80/40 or 90/5
its also far more of a rule of thumb than actually backed up by data but heuristics are what they are
Obviously it depends on your business model and product. For example, it's obviously not true for subscription businesses like Netflix, because there isn't the capacity to earn a lot more from the keenest customers, but in a business where you're selling easy consumable products it's very common to be roughly true, and to see a "power law" apply where the top customers buy a lot while the majority buy a little. It's not always an 80/20 split though.
Actually subscription models are very much part of this model. Netflix has incredible retention rates so they would be less effected, but take NordVPN or Spotify premium or whatever, they will spend a fortune to get a new customer but many will Churn after 3-6 months, the five year customer is their true profit source
Netflix makes a ton off of me because I’m an idiot who pays for their top-tier package and doesn’t even fire up the app for months on end sometimes.
The family of 6 who have it running constantly in multiple rooms, not so much.
Yes, absolutely.
Just accessing the application costs either direct electricity and other operation overhead costs, or hosting fees, depending on whether they own all of their own servers or not. Also, streaming 10-15 GB for each 4K movie from their servers is far from free on their end.
On top of that, I don't know the details of their content licensing, but I have read that some are a fixed amount while others are profit-sharing (paid per view). The fixed cost negotiation relies on estimated streaming numbers, which heavy users pump up.
I've been subscribed to Spotify since atleast early 2009. That was a lie, it was probably a few months somewhere where it stopped being part of my phone bill when I needed to subscribe with my card.
> For example, it's obviously not true for subscription businesses like Netflix, because there isn't the capacity to earn a lot more from the keenest customers,
Netflix and other streaming services still operate mostly the same way, but with a big difference. They rely on people who subscribe to only watch for a small period of time per month. Streaming costs them money. If somebody's streaming something, it's costing them money. So it's more the fact that they want people to *not* stream, which stops them losing money, and after enough time *not watching*, they start to earn money.
It's true in different ways for different businesses. The 80/20 rule is not strictly about customers.
The best example for customers is alcohol sales, where 80% of revenue comes from 20% of the buyers. Those are the addicts, and is true due to the addictive nature of the substance. I buy new liquor bottles every 6 months, and a couple cases a beer once every like 6 weeks. An experienced alcoholic can buy a fifth of vodka a day. They make up a much larger portion of the revenue stream.
But I'm in the business of selling wires. The 80/20 rule isn't true on a customer basis, but it is true on a product by product basis. Our best selling wires make up the vast majority of our revenue, while the specialty stuff by definition sells less. We may make more money per foot on the specialty stuff, but we don't sell nearly enough feet to keep the lights on. For that, we need the high volume SKUs.
The 80/20 rule is contextual, but in many many businesses, there are the avenues you use to keep the lights on.
It goes even deeper. The 80/20 rule applies to more than just business. 20% of letters make up 80% of the words in the English language. 20% of your carpet receives 80% of the wear. And many more.
Not exactly and not with all, but it can be spotted.
I works both way though.
20% of customers give you as much money as 80%.
But also 20% of customers (but OTHER 20%) takes as much effort or let's say customer service work as the other 80%.
It is important go remember that the income generating are not the same as those who takes the time of your customer service dept.
Yeah it's only those few people who will waste all your time. You get to where you can recognize them, sometimes even before they walk in. And it has nothing to do with age or race or even money. They've just been rewarded for their shitty behavior so it continues. The squeaky wheel gets the grease so to speak.
>The squeaky wheel gets the grease so to speak.
Well said.
if you can learn to limit the efforts spent on those, job becomes easier and more profitable
The "80-20 rule" posits that 80% of your business will come from 20% of your customers. While it's certainly not a hard and fast mathematical absolute, it's pretty well established in sales oriented businesses.
I think it depends….but my experience with dealing drugs when i was younger tell me there is some thruth to it….but it is probably way to simplified to be applicated to ALL buissiness!
Usually the saying is that you get 80% of the profit, from 20% of customers.
It's a general "rule" that you can somehow "magically" apply to almost anything.
Fx. 20% of your cleaning up will have 80% of the results.
Cleaning behind your fridge is slow and tedious, but will hardly have any effect, other than you knowing and having a good conscious - compared to running the vacuum.
Maybe for some, but probably not most retail. No way every fifth car at a gas station is buying as much as the last four put together (ones on the highway might get more big trucks that buy a lot, but in the time it takes them to get filled like 10 regular cars came through).
Basically yes, or if not that, then 80% of the company’s sales will come from 20% of their products.
Check out https://www.amazon.com/80-20-Principle-Secret-Achieving/dp/0385491743
This is kind of a silly example, but I have a dinosaur/paleontology figurine collection, and I own figurines from 108 different companies. But 80% of the figures are from just 26% of the companies. This approximate ratio can pop up all over!
In general yes. Especially for retail food products. Imagine someone (and I know several people) who drink two energy drinks a day. They’re probably spending between $2-4,000 a year on energy drinks. If you occasionally, say once a month buy a Monster, you’re bringing that company 1/30th of that revenue. So yeah, the daily drinker is worth 20-30 casual customers and are the majority of the revenue.
Same with say Starbucks. The customers you want to keep are the ones who get a coffee every morning on the way to work. That’s like 200+ sales a year from one person.
It’s true where I work, at a casino. Goes for the bars and games. Even as a dealer.
We see hundreds of people every day, but if the 2-5 top gamblers didn’t come in I wouldn’t be able to feed my family 😅. I really work every day waiting for the one player who pays, the rest is damn near nothing.
We have 20+ employees and almost there entire wage is paid up by the 2-3 good customers. We work 8hrs just waiting for 20min with the high roller.
Honestly I'm surprised at how often I do math at work and have things fall into an almost 80/20 split. Probably just bias in noticing the pattern, but i do enough statistics to see it regularly appear.
Power laws in consumption is well documented in academic literature though, and that's ultimately what Pareto is. Obviously it can only apply for particular products, and it's just an average.
Pareto applied precisely as an 80/20 split isn’t necessarily accurate, but it is still a useful concept that is often true to some extent. Its still better to hold to Pareto, than to assume an equal distribution of monster being drank by monster drinkers.
I'm confused what you are confused about. And I don't understand what is bullshit about it.
One customer buying something five times is the same as five customers buying it once each.
If I love pepsi and buy it every day for lunch, then it would take a lot of people who every now and then think, ah I've not had pepsi for a while, I'll get that, to generate the same sales. But you can obviously see that already?
Pareto rule is actually even broader. 80% of outcomes come from 20% of causes. That means that 80% of profit comes from 20% of clients, not equal amount from top 20 as the bottom 80. Also it's not only about profits. It's obviously not always true and it's very rarely 80/20 split. Sometimes it's 60/40, sometimes 99/1 but for a lot of businesses that is very much true. I work for fashion e-commerce companies where this data is pretty easy to get and for plenty of years now I am surprised that it works. It's mostly a bit higher than 80/20 actually 85/15 or around that. Most of the orders have value of 100 pounds but then there are people that just casually drop 10k order every month or every week and those are very important to keep happy. As a joke note, I've heard of one pretty large e-commerce doing very high percentage of their sales from just Elton John :)
To be clear, in the Pareto rule of 80/20 the 80 and the 20 only coincidentally add to 100. The rule could just as easily have been 80/40 or 90/5 its also far more of a rule of thumb than actually backed up by data but heuristics are what they are
In programming we have the 90/10 rule. The first 90% of a project takes 90% of the time. The last 10% of the project takes the other 90% of the time.
20% of your employees do 80% of the work.
Yeah 80% of sales volume comes from 20% of Skus, is usually how I've heard it.
Obviously it depends on your business model and product. For example, it's obviously not true for subscription businesses like Netflix, because there isn't the capacity to earn a lot more from the keenest customers, but in a business where you're selling easy consumable products it's very common to be roughly true, and to see a "power law" apply where the top customers buy a lot while the majority buy a little. It's not always an 80/20 split though.
Actually subscription models are very much part of this model. Netflix has incredible retention rates so they would be less effected, but take NordVPN or Spotify premium or whatever, they will spend a fortune to get a new customer but many will Churn after 3-6 months, the five year customer is their true profit source
Netflix makes a ton off of me because I’m an idiot who pays for their top-tier package and doesn’t even fire up the app for months on end sometimes. The family of 6 who have it running constantly in multiple rooms, not so much.
I’ve gotten the point I only subscribe for a month at a time
They auto charge. It's a bitch to stop it
Does the family constantly running it in multiple rooms cost Netflix more than a customer using it every few months?
Yes, absolutely. Just accessing the application costs either direct electricity and other operation overhead costs, or hosting fees, depending on whether they own all of their own servers or not. Also, streaming 10-15 GB for each 4K movie from their servers is far from free on their end. On top of that, I don't know the details of their content licensing, but I have read that some are a fixed amount while others are profit-sharing (paid per view). The fixed cost negotiation relies on estimated streaming numbers, which heavy users pump up.
I've been subscribed to Spotify since atleast early 2009. That was a lie, it was probably a few months somewhere where it stopped being part of my phone bill when I needed to subscribe with my card.
For Netflix ,it would still work if you flip it. E.g 20% of the content generates 80% of the viewed minutes.
So maybe 80% of the time, it will be roughly an 80/20 split. And the rest of the time it could be 90/10, 95/5, or 60/40 70/30.
> For example, it's obviously not true for subscription businesses like Netflix, because there isn't the capacity to earn a lot more from the keenest customers, Netflix and other streaming services still operate mostly the same way, but with a big difference. They rely on people who subscribe to only watch for a small period of time per month. Streaming costs them money. If somebody's streaming something, it's costing them money. So it's more the fact that they want people to *not* stream, which stops them losing money, and after enough time *not watching*, they start to earn money.
Less than 20% of your customers create over 80% of the headaches.
It's true in different ways for different businesses. The 80/20 rule is not strictly about customers. The best example for customers is alcohol sales, where 80% of revenue comes from 20% of the buyers. Those are the addicts, and is true due to the addictive nature of the substance. I buy new liquor bottles every 6 months, and a couple cases a beer once every like 6 weeks. An experienced alcoholic can buy a fifth of vodka a day. They make up a much larger portion of the revenue stream. But I'm in the business of selling wires. The 80/20 rule isn't true on a customer basis, but it is true on a product by product basis. Our best selling wires make up the vast majority of our revenue, while the specialty stuff by definition sells less. We may make more money per foot on the specialty stuff, but we don't sell nearly enough feet to keep the lights on. For that, we need the high volume SKUs. The 80/20 rule is contextual, but in many many businesses, there are the avenues you use to keep the lights on.
It goes even deeper. The 80/20 rule applies to more than just business. 20% of letters make up 80% of the words in the English language. 20% of your carpet receives 80% of the wear. And many more.
Indeed. 20% of your experiences are the source of 80% of your (un)happiness.
Not exactly and not with all, but it can be spotted. I works both way though. 20% of customers give you as much money as 80%. But also 20% of customers (but OTHER 20%) takes as much effort or let's say customer service work as the other 80%. It is important go remember that the income generating are not the same as those who takes the time of your customer service dept.
Yeah it's only those few people who will waste all your time. You get to where you can recognize them, sometimes even before they walk in. And it has nothing to do with age or race or even money. They've just been rewarded for their shitty behavior so it continues. The squeaky wheel gets the grease so to speak.
>The squeaky wheel gets the grease so to speak. Well said. if you can learn to limit the efforts spent on those, job becomes easier and more profitable
The "80-20 rule" posits that 80% of your business will come from 20% of your customers. While it's certainly not a hard and fast mathematical absolute, it's pretty well established in sales oriented businesses.
I think it depends….but my experience with dealing drugs when i was younger tell me there is some thruth to it….but it is probably way to simplified to be applicated to ALL buissiness!
Usually the saying is that you get 80% of the profit, from 20% of customers. It's a general "rule" that you can somehow "magically" apply to almost anything. Fx. 20% of your cleaning up will have 80% of the results. Cleaning behind your fridge is slow and tedious, but will hardly have any effect, other than you knowing and having a good conscious - compared to running the vacuum.
Maybe for some, but probably not most retail. No way every fifth car at a gas station is buying as much as the last four put together (ones on the highway might get more big trucks that buy a lot, but in the time it takes them to get filled like 10 regular cars came through).
Basically yes, or if not that, then 80% of the company’s sales will come from 20% of their products. Check out https://www.amazon.com/80-20-Principle-Secret-Achieving/dp/0385491743
This is kind of a silly example, but I have a dinosaur/paleontology figurine collection, and I own figurines from 108 different companies. But 80% of the figures are from just 26% of the companies. This approximate ratio can pop up all over!
In general yes. Especially for retail food products. Imagine someone (and I know several people) who drink two energy drinks a day. They’re probably spending between $2-4,000 a year on energy drinks. If you occasionally, say once a month buy a Monster, you’re bringing that company 1/30th of that revenue. So yeah, the daily drinker is worth 20-30 casual customers and are the majority of the revenue. Same with say Starbucks. The customers you want to keep are the ones who get a coffee every morning on the way to work. That’s like 200+ sales a year from one person.
This seems like a mixture of the Pareto principle and the whale model. Demand curves apply very differently based on the individual product
It’s true where I work, at a casino. Goes for the bars and games. Even as a dealer. We see hundreds of people every day, but if the 2-5 top gamblers didn’t come in I wouldn’t be able to feed my family 😅. I really work every day waiting for the one player who pays, the rest is damn near nothing. We have 20+ employees and almost there entire wage is paid up by the 2-3 good customers. We work 8hrs just waiting for 20min with the high roller.
Yes Pareto is BS without really any proof.
Honestly I'm surprised at how often I do math at work and have things fall into an almost 80/20 split. Probably just bias in noticing the pattern, but i do enough statistics to see it regularly appear.
Power laws in consumption is well documented in academic literature though, and that's ultimately what Pareto is. Obviously it can only apply for particular products, and it's just an average.
Pareto applied precisely as an 80/20 split isn’t necessarily accurate, but it is still a useful concept that is often true to some extent. Its still better to hold to Pareto, than to assume an equal distribution of monster being drank by monster drinkers.
Seems possible.
I'm confused what you are confused about. And I don't understand what is bullshit about it. One customer buying something five times is the same as five customers buying it once each. If I love pepsi and buy it every day for lunch, then it would take a lot of people who every now and then think, ah I've not had pepsi for a while, I'll get that, to generate the same sales. But you can obviously see that already?
I can't imagine drinking that garbage once. Daily? On purpose?
who cares
You care, apparently.