Blog post by Andrew Howard. The 80 / 20 rule is one of the most basic and fundamental rules of business, even life. Inspired by economist Vincento Pareto, who found that 20% of the pea pods in his garden contained 80% of the peas, it describes the economic phenomenon that roughly 80% of effects come from 20% of causes.
From a business perspective, this law is applied in terms of customer and sales; we understand that 80% of our sales or profits come from 20% of customers or products. Flipped around, this means that in order to be an efficient and successful business, we should focus on the 20% of customers or products that deliver most benefit. Essentially it’s the rule of the vital versus the trivial.
However, the internet and the ability to spend less effort on servicing the 80% of customers or products that make up the lowest 20% of business benefit has led to a phenomenon called ‘The Long Tail’. Powered by richer and more immediate customer and product data and freed from the conventional retail constraints of shop rents, limited shelf space and wastage, businesses such as Amazon and eBay are profiting because of the trivial, not despite it.
This ‘Long Tail’ phenomenon was first described by Chris Anderson from Wired magazine and inspired by what he called ‘an entirely new economic model for the media and entertainment industries.’ He noticed that despite years of being conditioned to listen to, watch or read items from the top 40, the internet and its ability to provide an almost limitless stock list of products had allowed consumers to make their own ‘hits’ from within the traditional ‘tail’. Furthermore, the tail was contributing more and more sales. Consider this: Amazon will sell more things tomorrow that it didn’t sell today than things it did sell today. Or put another way, Amazon will sell more CDs or books from outside the ‘top 40’ than from within the ‘top 40’.
So, what can businesses learn from the phenomenon of the Long Tail?
- Customer data is king – Amazon actively encourages its long tail through customer reviews and its ‘recommendations’ engine. The ‘Long Tail’ can be easily navigated thanks to simple two or three step journeys from mainstream to niche but this founded on high quality customer data and powerful analytics.
- Networks reduce cost – eBay (and to a lesser extent Amazon) have created their long tail by linking people together to provide unique or hard to get products and therefore creating an ever growing ‘stock list’. But whilst choice keeps growing, service costs are maintained because costs related to warehousing and distribution stay within the network.
The 80 / 20 rule and the Long Tail are both functions of choice. Where choice is governed by external factors such as shelf space or supply chain costs, the 80 / 20 rule will continue to be relevant (e.g. in high street retail). Where choice can be provided at no additional cost, the incentive to cultivate a long tail should not be ignored. Any on-line retailer not investing in, taking advantage of and continuing to evolve customer sales data and analysis is missing a trick.