Applying the Pareto Principle to Ecommerce

Industry Insight

Whether is is known as the Pareto principle, the 80–20 rule or the principle of factor sparsity the basic theory claims that 80% of the effects come from 20% of the causes. This principle is as important to Ecommerce as it is to any human endeavor.

The term was first posited by Business-management consultant Joseph M. Juran, who suggested it be named for Italian economist Vilfredo Pareto. Pareto first wrote in 1906 that according to his research 80% of the land in Italy was owned by 20% of the population. He then carried out surveys on a variety of other countries and found to his surprise that a similar distribution applied. Closer to home, he further developed the principle by observing that 20% of the pea pods in his garden contained 80% of the peas.

So outside of online pea farming and sales, how does this affect your online business?

“80% of your sales come from 20% of your clients”.

So are 80 and 20 magical numbers? While it’s said that any form of technology you can’t understand is indistinguishable from magic, your high-school Algebra proves the principle thusly (and removes the magic factor):

Mathematically, where something is shared among a sufficiently large set of participants, there must be a number k between 50 and 100 such that ” ‘k’% is taken by (100 − k)% of the participants”. The number k may vary from 50 (in the case of equal distribution, i.e. 100% of the population have equal shares) to nearly 100 (when a tiny number of participants account for almost all of the resource). There is nothing special about the number 80% mathematically, but many real systems have k somewhere around this region of intermediate imbalance in distribution.

So where does the Pareto Principle figure in E-Commerce and how can you use it practically in your own business? Many provable statistics relevant to entrepreneurs and business managers can help you plan everything from your business model to day-to-day operations. For example:

    • 80% of your profits come from 20% of your customers
    • 80% of your complaints come from 20% of your customers
    • 80% of your profits come from 20% of the time you spend
    • 80% of your sales come from 20% of your products
    • 80% of your sales are made by 20% of your sales staff

Therefore, many businesses have an easy access to dramatic improvements in profitability by focusing on the most effective areas and eliminating, ignoring, automating, delegating or retraining the rest, as appropriate.

Conversely, failing to properly respond to a problem which negatively affects Golden Twenty-Percent can sink your business, while retaining 90% of your sales/customers/employees.

One tried and true methodology is the American Customer Satisfaction Index developed by the University of Michigan Ross School of Business. It links quality, expectations and perceived value to overall customer satisfaction and loyalty.

But finding out what really works can be a hit or miss process – especially for small to medium sized businesses that don’t have the brand recognition or fanatical customer loyalty that larger corporations can draw upon. That’s why, no matter what the competition is doing, you should be following these five proven customer retention strategies to keep your best customers on board.

Seek out your customers, don’t always expect them to contact you

Customers want to know you are hearing their concerns. But sitting on your laurels because you feel that you already have great customer service isn’t enough. Find out where your customers (or potential customers) are talking about your company like Twitter and Facebook. Even “old fashioned” methods like sending a hand-written thank you card or a personal phone call can do wonders for your bottom line.

Make your customer service proactive, not reactionary.

Offer feedback forms and surveys on your website or store asking “How are we doing? Is there something we could do better?” If other companies comprise part of your customer base you should emphasize your customer’s business (or the area of their life that your company serves). This will yield much more valuable information in the long term. Find out not only how their business is doing, but where it’s going. Ask to be updated when they inaugurate new ventures or when they release new products. Acknowledge new product launches. Show that you sincerely have an interest in their work but can also high-light issues that could be applied to the way you market yourself and your business image.

Reverse the process for your own company

Keep your customers informed, not just by a sales pitch touting a new product. Let them know that you’re available to answer any questions they may have or any issues that come up goes long way toward cementing a place in their mind for great support that they’ll remember.

Generate Future Orders

Coupons, early adopter discounts, “good customer” discounts, a tiered partner system of prices are all good ways to prime the pump and keep customers coming back for other products or services.

Interactive marketing ads are a good way to directly involve your customers and make them feel their personal issues are being heard. Soft drink giant Coca-Cola, snack manufacturers like Doritos and candy companies like Skittles have done this successfully with video, viral marketing, contests, tell-a-friend promotions. Word of mouth from everyday people is more memorable and interesting than inundating people with advertising.

Manage and Resolve Complaints as Soon as You’re Aware of Them

Customer service delayed is customer service denied. Most customers won’t complain, they just won’t return, and what is worse, they may create a negative word-of-mouth, which like positive word-of-mouth is very effective. When customers do have an issue or problem it needs to be addressed as soon as possible. Company and product reviews can help your business, but they can also destroy your reputation.

Customer-centered companies cannot afford to simply sweep upset customers under the rug and hope the incident will be forgotten. Remedy the issue as best you can and as quickly as you can. Sometimes, the customers who complain the loudest can suddenly become fervent supporters and buyers.

Many other tried-and-true methods, such as sending gifts or preferred customer discounts have always worked to help spur sales and repeat business. But perhaps the most important point that truly drives customer retention home is to simply focus on building a relationship instead of getting a sale. By fostering an interest in your customers and getting to know their likes, dislikes, fears and goals, they will in turn eagerly support your business and your brand.

SalesWarp Storefront Management System includes a suite of Analytical and Reporting tools which can help you identify your top 20% and keep them happy. Click to find out more about the SalesWarp Storefront Management System.