Marketing’s 60/20 Pareto Law

Byron Sharp,Jenni Romaniuk,Charles Graham

doi:10.2139/ssrn.3498097

Abstract

We confirm our 2007 conclusions concerning the Pareto Law. Our conclusions are now supported by many other data sets, and independent analyses. It’s wrong to talk about an 80/20 law in marketing. 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. The exact sales contribution of the top 20% (a brand’s Pareto share metric) depends on the time period and some other technical decisions made by the person calculating the metric, and brand size and some category characteristics. But it’s reasonable to expect that almost half of your brand’s sales will always come from your very lightest 80% of buyers. It is also apparent that growth comes largely from these light, very light/non-brand buyers and so it would be foolhardy to ignore them.

Highlights

In the 12 years since we issued our report on the Pareto Law (Sharp and Romaniuk 2007) new analyses have been done by our corporate sponsors and recently by other academics
Should it really be expected that your top 20% of customers will contribute the vast bulk of your sales? Part of the reputation of the Ehrenberg-Bass Institute is built on asking questions about existing beliefs
Precise expectations of Pareto Share can be obtained from the NBD-Dirichlet model of brand choice (Goodhardt et al 1984) which fits with a number of well-established empirical laws

Summary

Introduction

In the 12 years since we issued our report on the Pareto Law (Sharp and Romaniuk 2007) new analyses have been done by our corporate sponsors and recently by other academics. These confirm our key results: 1 It is law-like and applies across brands and categories. 4 year, your heaviest 20% of customers won’t be so heavy, the light buyers will be heavier, and some of the non-buyers will buy (this is the law of buyer moderation).

Results

Conclusion