The reality behind the 80:20 rule and the perils of accepted, unquestioned wisdom
‘The truth? You can’t handle the truth!”
Colonel Jessop (from a Few Good Men)
This industry likes the idea of loyalty. Whole marketing disciplines, agencies and departments have been built on them. Like CRM agencies for example, or even, God forbid, social media agencies, building all sorts of platforms and activities for growing a loyal group of customers and extracting maximum value and attention from them.
The idea of ‘commitment’, and ‘affinity’ permeates of all sorts of marketing departments and their suppliers. It’s baked into their conversations, recommendations and outputs. Some even discuss building ‘friends’ or ‘fans’ as if they were selling rock stars or film icons.
Because, for years, we all have been led to believe that customers can not only be persuaded to have passionate feelings about brands, but that this is common and normal.
So in the last three months or so, there have been thousands of marketing experts planning the next financial year, hotly discussing if the big objective should be penetration (new customers), loyalty (more from the customers we have) or some mixture of both.
Yep, we like the idea of brands as constructions hewn from loyalty. It’s second nature.
One the most commonly known ‘rules’ that support this love affair with loyalty is ‘Pareto’s Law’ or the 80:20 principle. Marketing loves its golden rules and this one is the unquestioned rule of thumb that 80% of any company’s sales comes from 20% of its buyers.
If you agree with this assertion ( and most seem to do) it follows that it makes logical sense to focus budget on your heaviest buyers, the small minority that makes up the bulk of your volume.
Just as it makes sense to largely ignore the majority your customers who only account for one fifth of sales.
Or make light buyers more loyal.
And so it goes.
Unfortunately, when we look at what people really do, the rule begins to break down. The accepted wisdom is not quite as wise as we’d like to think.
Anyone who makes the effort to look at the actual data, over a decent amount of time, 12 months, not quarter to quarter (3 months to be honest doesn’t, capture the buying behaviour of light buyers properly, for example, there are plenty of buyers of Coke who buy it only once a year, or once every TWO years and standard, quarterly reports don’t pick this, therefore don’t give a clear picture) will find that the 80:20 rule is more like the 50:50 rule. That top 20% accounts for little over half of sales in most brands and most markets.
Not 80%
Not even close.
For example, analysis of US Nielsen data, carried out by Professor Byron Sharp of the Ehrenberg Bass Institute shows that the heaviest 20% of buyers account for:
51% of the average washing up liquid’s volume sales
54% of the average breakfast cereal brand’s volume
Ahah! You say, these are low interest markets. What about stuff that people care about more? Like soft drinks?
Back to Coke – even here, the average soft drinks brand gets 65% of volume from it’s heaviest buyers.
This is miles off the messianic 80:20. Not even close. Even in the soft drinks category – you know, Coke, Pepsi etc.
And just in case you wonder if this is specific to the US; in South Africa, looking at the deodorant category over 12 months, the heaviest 20% of buyers accounted for:
53% of both Sure and Lynx’s sales (Lynx a so called ‘iconic’ brand)
51% of Rightguard
48% of Dove (a brand much loved apparently thanks to it’s ‘Campaign for Real Beauty’, but with it’s top 20% of buyers not even making up half its sales!)
The data not only shows that about half your sales come from people that don’t buy your brand very much, the majority of people who buy any brand are light buyers.
Light buyers don’t buy very often because – like or not – they don’t care about the brand or the product very much. Like any human being, there are far more important things in their life. Like family, friends or Eastenders.
Not only are half your buyers not remotely loyal, this real law based on actual human behaviour suggest it’s nearly impossible to get that figure any higher. Whatever the category,whatever the country.
Even more startling, to call your top 20% ‘loyal’ is a wild distortion of the truth.
TNS data tells us that, in the UK, 50% of Coke’s buyers buys just one or two cans or bottles a year.
30% don’t even buy ONCE a year, but there’s so many of them they add up to lots of sales.
That leaves the heavy ‘top 20% buyer’ buying Coke three or more times a year. That really doesn’t create an image of someone who drinks Coke morning noon and night, someone who is massively loyal or, ‘a fan’.
There are people like that, but they make up a tiny fraction of total buyers and total sales and in truth individuals who have an obsessive need for a particular product are often a little strange or unhealthy.
The reality is that the top 20% of buyers don’t account for as many sales as most believe, and even then, even with the most iconic brand in the world, in no way would you call most of them them ‘loyal’ or something even approaching that.
The rhetoric and accepted wisdom leads us to accept the importance of loyalty, and slave away trying to create ‘loyal’ buyers. But the actual evidence blows a very large human shaped hole in all of this.
It tells us that the key to growth is not really loyalty, certainly not to the exclusion of all else. Maybe it even questions the point of CRM and loyalty programmes.
Put another way, the key to brand growth is a very, very, weak form of loyalty from a lot of very, very light buyers, and that includes customers in that wildly misunderstood 20%.
People that are not really that bothered.
Marketing to people who aren’t that familiar with you, won’t buy from you that often and can’t be persuaded to care that much, is very different to marketing to people who you assume follow everything you do and can be made to ‘love’ you.
And based on how real humans actually behave when they buy stuff, then thats the real question marketing folk need to address.