Pareto Principle

Pareto principle

The Pareto principle is also known as the 80/20 rule. From your own experience you may have come across it, for example 80% of our business comes from 20% of our customers. The principle itself states that 80% of the effects come from 20% of the causes. Let’s look at this in a little more detail.

As a marketer, you will of course put more of your efforts into your more profitable customers, whilst attempting to move the 80% towards becoming more loyal customers. We are now moving towards customer loyalty, so let’s have a look at a tool that will help us with that. Also see our lesson on the loyalty ladder.

Cause and effect tend to be strongly related. If I throw a stone at a window (i.e. the cause) and the stone travels through the air, and hits the window then the window breaks. The broken window is the effect. There are many other examples in business such as 80% of profit comes from 20% of our products or services. From sport 80% of our goals come from 20% of our players. Try to think of some examples from your own experience.

The reason that the Pareto principle is used together with the marketing relationship, is that the bulk of your profits and long-term relationships will probably arises from 20% of your customers. Therefore you need to know as much about your customers as possible, and the customer database helps us with this. In fact technology today is ideal for retaining customers, as well as recording new information.

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