In the late 1800s and early 1900s, while chairing the Political Economics department at the University of Lausanne, Vilfredo Pareto began building a series of arguments on wealth distribution.
Namely, that it followed a law-like pattern, and that 80% of wealth was owned by 20% of a population.
In other words, the 80/20 Rule or the Pareto Principle.
Except, Pareto didn’t name it (though he is credited with popularizing the term “elite” in social economics, and helping lay the foundation for behavioral economics. Smart dude.) That was Joseph Juran, an engineer and management consultant.
Juran also described the Pareto Principle as the “vital few and trivial many,” finding applications for it in business.
While it’s true that the 80/20 Rule exists almost everywhere we turn, it doesn’t apply to a brand’s customers and their revenue contribution—at least not to that extreme.
In “How Brands Grow” and subsequent studies, Byron Sharp showed that the distribution for brands is more like 60/20 (20% of customers deliver 60% of revenue).
Why spend a newsletter on a history of economics lesson?
Well, for one, Juran’s view on the “trivial many” has been adopted by a wide set of marketers who are caught up in “turning a first-time buyer into a loyal subscriber.” (Most software vendors are guilty of parroting this line, too.)
There is an obsession right now with serving the “vital few.” With predicting who among new customers will make their way into that set. With building a brand solely exclusively through loyalists.
It is true that a small subset of customers make outsized revenue contributions. But the valuable work is actually elsewhere.
That’s because, unlike other applications of the Pareto Principle, customer value comes in waves. We buy frequently, then heavily, then not at all. We subscribe and we churn. And then we buy again.
As we wrote in “The Messy Middle:”
We like to think we’re loyal.
But, really, we’re fickle. We’re not loyal in absolute terms and we’re not loyal indefinitely. Mostly, we have preferences. And we change our preferences for seemingly random reasons.
All of which is to say that the 20% of your customer base that delivers 60% of your revenue today is likely to be in the 80% of your customer base that delivers 40% of your revenue tomorrow—and that’s if they’re an active customer at all.
In other words, the distribution of revenue may be constant, by the underlying composition of that distribution is not.
This is where an obsession with loyalty and chasing more of the “most valuable” customers falls short. No one customer type is fixed in their behaviors. That means all customers are more alike (we all change our behaviors and move between groups) than they are different.
For brands, then, the mission shouldn’t be so much seeking out more of the 20% insomuch as it should be in understanding why and how customers slide in and out of their respective groups.
Do that, and you’re more likely to find every customer is “vital.”