Using Pareto’s Law and Flip Traditional Marketing

Vilfredo Federico Damaso Pareto was an Italian economist that made a famous observation in 1906.  He stated:

“20% of the population in Italy owns 80% of the property”.

The rule was popularized in the early 1940’s by Joseph Juran and is now commonly referred to as the 80/20 principle, i.e. 20% of your customers will account for 80% of your sales or 20% of your efforts will net 80% or your results.  Juran applied the principle in the area of quality management.

CASE IN POINT: Stew Leonard’s is a retailer that always understood the Pareto Principle. They own the distinction of being the most profitable grocery store per square foot in the world.  They’ve done this by carrying only a couple thousand of items in the store, a mere fraction of what a normal grocery store would carry.  The Leonard’s made a conscious effort to concentrate on the best selling 20% of grocery items.  Instead of stocking 10 varieties of an item, they may carry one or two of the leading brands.  This creates a nice double-edged sword.  Stew’s saves space by merchandising less and then buys deeper into the selected product to get the benefit of preferred pricing.  Efficiency and profitability in one fell swoop.

Enter the Phelps 80/20 Corollary

If we subscribe to the principle that, “80% of your results is generated by 20% of your efforts”, then I respectfully posit the Phelps corollary:

“80% of your traditional marketing efforts will net you 20% of the results”

We know that traditional marketing (tell and sell broadcast advertising) is woefully ineffective.  I always go back to the infamous Joseph Wanamaker quote about advertising,

“Half the money I spend on advertising is wasted . . . the problem is that I don’t know which half”.

I personally think 50% is an understatement and therefore I put forth that for the vast majority of your marketing spend on the traditional funnel (the 80%) . . . you are receiving one dollar worth of return for every four that you spend given the Phelps 80/20 corollary.

The Revolving Door Effect

There is a huge flaw when you focus the majority of your marketing efforts on the purchase funnel.  That flaw is what I call ‘The Revolving Door Effect’.  Because the majority of your marketing is mainly focused on prospective customers, you may only be adding 10% to 25% of new customers per year.

Wait a second  . . . most companies would say, “Sign me up right now for an increase of 10% to 25% of customers per annum”.   The problem is that most businesses have huge problems with retention.  It may not be uncommon to lose 10% to 25% of the customer base in a given year.  The net effect is that you might negate all of your gains and in essence create a revolving door by not taking care of your new and current customers.

Flipping the Funnel

The overwhelming traditional view of marketing is that it’s mainly about the process of acquiring prospective customers.  Eighty to ninety plus percent of marketing budgets are aimed towards getting consumers into the ‘purchase funnel’.  We’ve become so preoccupied about generating awareness and interest that we forget about our most important asset . . . our current customers.  We need to ‘Flip the Funnel’ on traditional marketing.  First we need to heed Pareto’s Law and determine the 20% of traditional marketing we are doing that is generating a strong ROI.  Once you’ve earmarked that vital 20%, it’s time to put the other 4/5ths to work by ‘flipping the funnel’ and putting the focus squarely on current customers.

By putting the focus on your current customers, you can generate the following three benefits:

–     Reduce attrition

–     Increase satisfaction

–     Promote loyalty

Bumping Customers Down the Funnel

The net effect of focusing on your customers first and foremost is fourfold by bumping them down the flipped funnel:

1.   New customers become Occasionals

2.   Occasionals become Frequents

3.   Frequents become Regulars

and most importantly

4.  Regulars become Evangelists

Today’s Lagniappe (a little something extra for good measure) – Here’s a little further background on Pareto from the Juran Institute.  This video was shot at the Lockwood Mathews Mansion in Norwalk, CT (where I had my wedding reception):

Lagniappe defined: A marketing lagniappe, i.e. purple goldfish,  is any time a business goes above and beyond to provide a ‘little something extra’. It’s that unexpected surprise that’s thrown in for good measure.

How do you stand out in the sea of sameness? How do you win repeat customers and influence word of mouth?  Are you Giving Little Unexpected Extras?

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