From The Business Shrink: In every walk of life you can find examples of the 80/20 rule. You can get very simplistic and also very complex with the examples. Some quick examples that are spoken of repeatedly in college textbooks are things like:
20% of customers produce 80% of the profits
20% of employees produce 80% of the real results
20% of the input creates 80% of the result
20% of a sales force produces 80% of the sales
You can also get more creative and look at these rules in the life as a blogger, digger or every day events.
80% of website visitors view only 20% of the web pages
80% of Digg Front-page items are by 20% of the Digg Users
20% of program features in a program like Word cause 80% of the use
20% of blog posts will create 80% of the traffic
20% of car repairs will cost 80% of your money
A well respected MIT professor named Noam Chomsky talks about the 80/20 rule in this video on YouTube here. Chomsky talks about how big business tries to figure out who the most profitable 20% of customers are and attempt to eliminate the rest of the 80% of customers to reduce costs.
It’s hard to argue with the facts of the 80/20 rule that were discovered back in 1906. The economist that broke this discovery lived in Italy and realized that 80% of the land in his homeland was owned by 20% of the actual population in Italy. His name was Vilfredo Federico Damaso Pareto and the 80/20 rule has been labeled as “Pareto’s Principle.” Pareto expanded his theory and applied it to many other things in life. Another interesting occurrence that Pareto found was the application of the 80/20 rule to gardening with peas. Pareto found that 80% of the peas were created from 20% of the pods. As much as the 80/20 rule has become a standard in economic theory, a team of researchers at the Sloan School of Management at MIT have crafted a new theory that shows the 80/20 rule may be fading in the world of Internet business. A few years ago the researchers released a study on the rise of niche products on the Internet and how they could be reversing the consistency of the 80/20 rule in business. One example that was widely talked about was a study on Amazon.com’s book selection. It was noted that Amazon had a big secret people were not paying attention to, hidden revenue. What was revealed was that unknown book titles that can’t be found in brick and mortar stores were producing 40% of Amazon.com’s revenue.
When the first study was released from the researchers at MIT another name hit the market preaching the fall of the 80/20 rule in Internet business and the rise of, “The Long Tail.” Chris Anderson is an editor at Wired magazine and he developed a theory called Long Tail. Anderson’s book, The Long Tail: Why the Future of Business is Selling Less of More, became a best seller which slid his book right into the 20% of books selling best in brick and mortar bookstores! As stated on Wikipedia here, Anderson argued that products that are in low demand or have low sales volume can collectively make up a market share that rivals or exceeds the relatively few current bestsellers and blockbusters, if the store or distribution channel is large enough. An Amazon employee described the Long Tail as follows: “We sold more books today that didn’t sell at all yesterday than we sold today of all the books that did sell yesterday.”
Now researchers of MIT have done it again and come out with an even more in depth report on the Long Tail Theory and made it public. You can get this report here. The new report is titled, “Goodbye Pareto Principle, Hello Long Tail: The Effect of Search Costs on the Concentration of Product Sales.” Sloan researchers were able to get sales records that went back through a good sample set of years of a women’s clothing company. The key to the analyzed sales was that sales data was coming from not only the snail mail catalog sent to customers but it was also sales data from the Internet storefront for this women’s clothing company. The interesting trend researchers found was that the 80/20 was only applying to mail order catalog sales. The 80/20 rule was not holding true when analyzing the sales data of the online storefront of the private-label women’s clothing company. Once the data was made so clear executives quickly rethought their strategy and began sending out less catalogs by snail mail and gearing marketing towards their online offerings.
