Pareto - part 1
Jun 17
Pareto discovered that 80% of wealth was held by 20% of the population across most countries across most time periods. He was then able to find that this rule held true over most things.
Today, retailers know for example that 80% of their sales come from the top 20% of their product range. Or that just the top 20% of their top customers account for 80% of their sales. This ‘rule’ tends to hold true across most businesses and most fields. You may conclude from this that because of the huge cost of carrying stock – why not only stock the top 20% of items. There is a danger in this which a real life example may help illuminate.
It is known in the sandwich retail business that most customers will only ever buy one of three sandwiches (is this true for you?). However, customers like to choose from at least 10! (again is this true for you?). Customers feel very annoyed when they can only choose from a few – even if the ones available for selection are the ones they would choose from!
Customers need variety so there is a danger in cutting back to much, but nonetheless, Pareto optimality is useful in determining a business strategy. I would urge you to use this rule as much as you can. Focus your marketing spend on the 20% of your customers that generate the most profit, focus your stock availability on the top 20% of items. Focus most of your processes on the areas that generate most of the output.
Recalling Pareto always makes me smile as it brings back an anecdote which occurred in the first six months of my post university career. I was working for Mr. Kipling cakes and I went with my arrogant know-it all boss (Mr. S) to see a customer who was stocking our range of products. He explained to us that he needed to look at the range he was stocking.
Customer “I need to look at the range I am stocking. Pareto runs this shop”
Mr. S “And where is Mr. Pareto today?”
I got a telling off for laughing (I know you should not laugh – but it was funny because my boss thought he knew everything)
It was also nice to be able to apply something I learnt at University to my job selling cakes!
Hi and welcome to my blog. 
Jun 17 at 14:13
“Today, retailers know for example that 80% of their sales come from the top 20% of their product range.”
True perm but the past 10 years have seen a sysmic shift in a retailers positioning. It’s Long Tail stuff.
Amazon, itunes etc have now almost no costs associated with hoilding stock so there is an enormous market in just selling 1 or 2 of millions of diffrent items.
If your in the traditional retailing marekt then fine but if you a re online what are the actual costs of increasing your range. If they are next to nothing then concentrating on the tail could be more profitable as you don’t have to compete with the main players
Thats why i love the web. It turns all this on it’s head
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