Does 80% of Your Revenue Really Come From 20% of Your Customers?
We’ve all heard this phrase. It’s the ‘Pareto principle’, identified by Vilfredo Pareto in 1896. He was a smart cookie.
“But that data is so old!” you say? Don’t worry: in the past 120 years, we’ve got lots more data, from lots of realms, to test Vilfredo’s theory.
The latest batch comes from over 330 publicly-traded non-CPG firms, for both product & services, care of scholars Daniel McCarthy at Emory & Russell Winer at NYU.
Do they find an 80/20 pareto ratio of revenue? Not quite.
For non-subscription firms, they find a 68/20 ratio on average. For subscription-type firms, the average is nearly 10% lower, at 59/20.
Are there firms with a perfect 80/20 revenue ratio? Indeed. But not a ton. And on the flip side, there are firms with a 50/20 (which is common in CPG), and even a 30/20 ratio. 30/20!!
WHY DO WE LOVE THE 80/20?
First, it sounds nice. Seriously. 80+20=100. And 55/20 sounds clunky. That helps make it FEEL true and stick in our brains more.
Second, it’s familiar. It’s been around forever. So it's comfortable and seems like "common knowledge".
And third, it helps confirm the belief that we really gotta focus on our heaviest buyers, because they make up so much of our revenue. (Other data suggests otherwise too.)
SO WHAT?
Well, first, you need to know what your pareto ratio is for your industry, and whether your company is normal or abnormal. So check your numbers.
And second, if your ratio is lower — like 50/20 — it means that HALF your revenue comes from your light & medium buyers. So you’d better give them some love too.
Caveats, of course. But read the paper. It’s lovely.
https://lnkd.in/dYYVRkzR