The 80/20 rule rendered such confidence in the marketers’ mind that it has become the precept despite not being verified through hard-and-fast mathematical or econometric analysis
Consumer behaviour inevitably changes over time brought about by era-specific factors. To be more specific, the four major forces which shape the marketing environment include technological changes, globalisation, social responsibility, and consumer concerns about sustainability. For instance, consumers these days, prefer perceived value over actual monetary value.
Marketers, therefore, are required to acknowledge the changing dynamics to sustain and grow with these new marketing realities. Before delving into changing marketing principles, here's a bit of context.
Marketing as an academic field emerged in the early twentieth century through continuous research and development on marketing and sales principles. However, previously established theories have become obsolete and modified principles have gained ground with changing circumstances. This article talks about such a paradigm shift in marketing. It will emphasize on the three-dimensional theory and show how it is more practical now than the two-dimensional theory.
The 80/20 theory was first suggested by Dr Joseph M. Juran, a quality management consultant. The theory is also called the Pareto principle which was named after Italian economist Vilfredo Pareto who noted the 80/20 connection in 1896. Over time, this principle has become one of the most commonly used theories in the marketing and business world.
Gradually, over the last century, it has become a proverb in the business world that "80 percent sales come from the 20 percent clients". In its simplest form, it means that 20 percent input produces 80 percent of the result.
The 80/20 rule rendered such confidence on the marketers' minds that it has become the precept despite not being verified through hard-and-fast mathematical or econometric analysis.
In 2010, Byron Sharp and others published a book titled- "How Brands Grow". They articulated that the "80/20 law" was a misleading simplification. The authors also stated that the ratio may be somewhere around 60/20 but not as extreme as 80/20.
Based on a decade of observation, they found that in a year, a consumer brand's heaviest (most frequent) 20 percent of buying consumers contributed around half of the brand's total sales that year. Specifically, they reported that the brand average across categories was 59 percent, ranging from as high as 68 percent for Dog Food to as low as 44 percent for hair conditioners.
Other studies conducted by Brynjolfsson, Hu, and Simester (2011) on women's clothing retailing, Romaniuk and Sharp (2016) on groceries categories in developing markets (e.g., Malaysia, India, Kenya & Mexico), and Steenkamp (2017) found results around 60/20 or 53/20 or 50/20, and 65/20 rule, respectively.
Professor Gerald Goodhardt unveiled a law at 20:30:50 which is closer to real-life findings. This rule states that "the 20 percent heaviest buyers account for 50 percent of purchases, the 50 percent lightest buyers account for 20 percent of purchases. That means the middle 30 percent of buyers account for 30 percent of purchases. In short, 20:30:50 buyers accounting for 50:30:20 purchases."
There has been a paradigm shift in terms of consumer behaviour due to global digital common communication and improving technology. Goods of similar quality can move from one part of the world to another within days, thanks to advanced technology and AI R&D.
Thanks to these developments, the 80:20 rule no longer holds and most of the global marketers have begun to follow the 20:30:50 rules.
In Bangladesh, the older generation of marketers still believes that the 80/20 rule works. But the question is, how can they manage constantly changing consumer behaviour through the two-dimensional 80/20 rules?
In B2B case analysis, it is observed that majority sales volume is contributed by 20 percent of the clients but in terms of revenue, it resulted in decreasing returns because of competitive offers.
On the other hand, 80 percent of clients contribute fewer volumes, but much higher revenue. Most of these consumers are the mid-level and light buyers. These findings corroborate the assumptions from the researchers.
In B2C case analysis, revenues exhibit similar trends. In the dynamic market, depending on only 20 clients would be high risk and the company may end up losing the market share. So, the marketer should change the mind-set from 80/20 to 20:30:50 rules for sustainable business development.
Over the last decade, the Ehrenberg-Bass Institute for Marketing Science studied consumer behavior. They received fundings for these studies from corporate sponsors like Coca-Cola and others and they finally concluded that "It's wrong to talk about an 80/20 law in marketing."
Md Shahin Alom is a Deputy General Manager in MJL Bangladesh Limited.
Disclaimer: The views and opinions expressed in this article are those of Md Shahin Alom and do not necessarily reflect the opinions and views of The Business Standard.