Top 3 Ways to Use the Pareto Principle in Marketing

Vilfredo Pareto, after whom the Pareto Principle is associated with, observed that in his nation, Italy, 20% of its people owned 80% percent of the land. This concept holds true in many cases, from statistics to operations and even marketing. For today, the blog will be covering its use cases in marketing.  

The Pareto Principle, aka the 80-20 rule, states 80% of results come from 20% effort. Besides its use in quality control to analyse related factors that have the most impact (also see Pareto chart), it can be of great use in the marketing context. 

In marketing, the Pareto Principle can be used to identify the most profitable customers, products, or marketing channels, which are relatively lesser compared to the profits they yield. Marketers can maximise their results and optimise their resources by focusing on the 20% of customers or products that generate 80% of the revenue.

Here are some ways how you can use the Pareto Principle in marketing with some examples.

Identifying Profitable Customers

Using the Pareto Principle, marketers can identify the top 20% of customers who generate 80% of the revenue. These customers are often referred to as “high-value customers” or “VIPs.” Marketers can improve customer engagement and retention, increase sales, and build brand loyalty by focusing on these customers.

Marketers can segment customers and look into customer lifetime value (CLV) to identify high-value customers. Based on that, marketers can understand the interests of their most profitable customers and tailor their marketing strategies accordingly.

Suppose a retailer finds that the top 20% of its customers are mostly women between the ages of 25 and 45 who buy high-end cosmetics and skincare products. In that case, it can create targeted marketing strategies that appeal to this demographic. It can also offer personalised recommendations and rewards to these customers to encourage repeat purchases.

Focusing Profitable Products

The Pareto Principle can help you identify the top 20% of products that generate 80% of the revenue. These products are often referred to as “hero products” or “cash cows.” Marketers can optimise their product mix, reduce inventory costs, and increase profit margins by focusing on these products.

You can use sales data, profit margin analysis, or product affinity analysis to identify hero products. These tools can help marketers understand which products are most popular, most profitable, and most complementary to each other.

Let’s say a retailer finds that 80% of its revenue comes from a few best-selling products. In that case, it can focus its marketing efforts on these products and create cross-selling or upselling opportunities to maximise revenue. It can also reduce its inventory of less profitable products to free up resources for more profitable ones.

Optimising Marketing Channels

Marketers can identify the top 20% of channels that generate 80% of the leads or conversions and allocate their resources accordingly. This can help them maximise their return on investment (ROI) and improve their overall marketing efficiency.

To identify the most effective marketing channels, marketers can use attribution modeling, conversion tracking, or A/B testing. These are some ways to help marketers understand which channels are driving the most conversions, which messages and offers are most effective, and which channels are underperforming.

Suppose a B2B company finds that most of its high-value leads are coming from LinkedIn and email campaigns. In that case, it can allocate more resources to these channels and optimise its content and targeting to appeal to this audience. It can also reduce spending on less effective channels, such as display ads or print media.

Parting Thoughts

In conclusion, the Pareto Principle can be a powerful tool for marketers to maximise their results by focusing on the 20% of customers, products, or marketing channels that generate 80% of the revenue.