Digital Marketing & Technology Glossary Of Terms

Pareto Principle

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The Pareto Principle, also known as the 80/20 rule, is the name given to the theory that around 80% of the effects are derived from 20% of the causes. When applied to eCommerce, it means that 80% of a company’s revenue comes from around 20% of its customers. It’s encouraging because it shows a hardcore of very dedicated and very loyal returning customers, but also concerning because it suggests that the majority of customers are not returning.

Where did the Pareto Principle come from?

The Pareto Principle began with 19th Century Italian economist Vilfredo Pareto. Noted for his sociological insight, Pareto observed that 80 per cent of Italy’s land was owned by just 20 per cent of its population. The theory crystalised in his mind when he noticed a similar phenomenon in his peapod harvest: the majority of the peas were being produced by a minority of the peapods.

The concept was immortalised in Pareto’s 1896 paper Cours d’économie politique and grew from there. Eventually, it came to be applied to science, mathematics, computing and even sport. However, it’s in economics that it’s best known. Meanwhile, Pareto himself would lend his name to a number of other key theories, including the Pareto Index, the Pareto Efficiency and the Pareto Distribution.

What does the Pareto Principle mean in eCommerce?

The Pareto Principle is a way for eCommerce sites to understand the number of loyal, returning customers they have. If most of their sales are coming from a handful of customers that suggests those customers keep coming back.

This is encouraging, but it means there’s more work to be done. eCommerce sites need to boost the number of these high value, loyal customers to make sure that profits keep rising. Essentially, they need to ‘beat’ the Pareto Principle and shift the 80/20 numbers. But how can this be done?

How can businesses change the Pareto Principle?

In the digital age, one of the driving forces behind the Pareto Principle is relevance. The rise of smartphones and Google’s Micro Moment philosophy has meant that speed and convenience dictate customer engagement: give the customers what they want when they want it and you’ll find success.

Doing this isn’t simple though. How do you know what the right thing is? How do you know what the right time to deliver it is? How can you achieve that all-important relevance?

Personalisation is the best solution. By tracking customers’ interactions with your products, you can gain an understanding of which are most popular with which people, and use that information to tailor your offering in the future. Thus, you’re offering relevance (the right thing to the right person) and increasing their chances of becoming a high value, loyal customer.

Is personalisation enough?

However, personalisation is misunderstood by many, and not all kinds of personalisation are equally effective. Simply adding a person’s name to your website when they log-in, or into an email you send out, isn’t enough.

Nor are more complicated forms of personalisation. Product recommendations, for example, have their place and can provide great results, but can sometimes be ineffective, while A/B testing and Conversion Rate Optimisation can also have positive effects, but are equally flawed. None are comprehensive enough and none offer a strong enough guarantee of results.

It’s necessary to understand anonymous visitors on an individual level by using semantic analysis of content and Customer Journey Optimisation to understand their interests. This involves more than just working out what products they’re looking at; it’s understanding every page they view and drawing from that some clear insight into what they might be interested in.

By doing that, any kind of content has value and every interaction pushes you closer to getting a clear understanding of what’s relevant to your each and every one of your customers. This ultimately means you can engage them immediately because you know what will engage them and therefore persuade them to keep moving through your funnel.

Conclusion

Personalisation alone will not necessarily beat the Pareto Principle odds, but it’ll help. For eCommerce-based businesses, the Pareto Principle is all about relevance: making sure you deliver the right thing to the right person at the right time. By using semantic analysis of content and Customer Journey Optimisation and the semantic analysis of content to its maximum effect, eCommerce brands can ensure they do that and start turning those elusive anonymous customers into high value, returning ones.

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