The Pareto Principle, which is also known as the 80-20 Rule or the Law of the Vital Few, states that 80% of the effects come from 20% of the causes. In marketing-speak, the Pareto Principle means that, very often, 80% of sales come from 20% of consumers.
Should marketers focus on only the most highly motivated target consumers? Or is there a benefit to aiming programs at other segments as well?
Standard MBA answer: It depends.
ReplyDeleteI think both should receive some attention in some form or another. I think for the 20% they should be involved in some sort of loyalty offering. I.e. some way that tightens their connection and involvement with the brand and fellow members of the 20%. Or, even better, getting them to be almost evangelistic about the brand. Get them to voice their love for the brand and all it's benefits and thereby attract some of the ho-hum 80% crowd into the fray.
For the non-brand loyal, price sensitive folks I think that hi-ho deals, coupons, etc. are the way to attract them. Once they come, there should be an aggressive effort to get them involved in some type of loyalty offering.
I believe Andy brings up a great point about tightening the 20%'s connection to a brand in hopes that they would be voice their love for the brand to the "ho-hum 80% crowd," but I also believe that it's incredibly important to aim marketing programs at the 80%. High brand awareness is essential to the success of the brand, and to gain high brand awareness you want the general population to recognize your brand whether they are currently a non-purchaser or not. Perhaps down the road, when faced with a decision to purchase some type of product, they will recognize your brand from advertising and promotional activities and choose your brand over a competitor's.
ReplyDeleteAs Andy mentioned, coupons or incentives are a great way to get the 80% involved in the brand and convert them into brand loyalist assuming they have a good experience with the brand. It is thus the brand's responsibility to deliver the experience that will then motivate these customers to become highly involved.
If the 20% of heavy users result in 80% of the sales, than a company should spend the majority of its resources on this 20%. In fact, I might argue that 75% of marketing resources, advertising, and promotional budgets should be spend on these brand loyalists. As mentioned above, these users act as brand evangelists and will thus spread word about the product for the company. This word-of-mouth and "earned" advertising cost the company nothing. If brand evangelists can do it at little to no added cost to the company, why would a company spend more than the bare minimum attracting these customers.
ReplyDeleteMoreover, the most trusted form of advertising is from friends and family. Through research I did this summer, I learned that second to that information is information found on blogs and other consumer-generated content. In the past, the second most trusted was from the company's own advertising intiatives. Since this is no longer the case and the most valuable advertising comes from forces external, company's should embrace the trend and save themselves the resources in the meantime. Of course, investments should be made by the company to monitor and oversee things being said about the brand within the digital realm, but they may get more "bang for their buck" if they concentrate marketing resources to the top 20% of their customers.
I agree with Hailey's point that advertising to the 80% is extremely important for making your brand known and getting it out there. The greater your advertising reach, the greater chance that more people are being exposed to the advertising and therefore, more people following through and actually buying. Advertising to more people means that you have a larger 20% to work with than if you were only advertising to your loyal customers.
ReplyDeleteThat isn't to say that advertising that is focused onloyal customers isn't important also. In fact, many companies have recently been rolling out new loyalty programs and they have been extremely successful both in increasing sales from loyal customers and in growing the companies loyalty base. It all comes down to balance. It isn't enough to market to just one of those segments, both have to receive some kind of attention to create awareness for the brand.
As said before I think both should receive some attention in some form or another. First-time users are not heavy users, but they represent the future. If a company doesn't keep winning these beginners, eventually, it goes out of business. Developping advertising campaigns to win with first-time users often is referred to as point-of-entry marketing.
ReplyDeleteA major consideration in segment selection is the segments'size and growth potential.When assessing size, marketers must keep in mind that the number of people in a segment of heavy users may be relatively small, but the extraordinary usage rates of these consumers can more than make up for their small numbers (cf. 80% sales come from 20% consumers).But I think marketers must often be most interested in devoting ressources to segments projected for dramactic growth (example: the purchasing power and growth projections for people age 50 and older in the next decades). So, yes there is a benefit to aiming programs at other segments with coupons or incentives for example as Andy said.
I believe that in the beginning small companies should target niche communities in order to develop and understand a target audience. Once they know their market they can begin to build their company's voice to appeal to them. I believe the company should try its hardest to really get to know and understand this 20% of consumers. If it can build a reputation and engage its members I think it could lead to a strong ardent following.
ReplyDeleteWe learned that marketers should target the right type of customer that isn't dependent on incentives. The Guinness ad that we talked about in class relates to this issue. Some students noted that despite not being beer drinkers they were still drawn in by the commercial. So I think while marketers should target the loyal 20% they shouldn't completely ignore the majority 80%. Spreading awareness of a brand can help build the loyalists and weed out the irresolute. As they say: theres no such thing as bad press.
I think its important for companies to expand their marketing to the 80%. While the 20% may contribute the largest portion of sales in many cases they are brand loyal and will continue to keep on coming back unless something incredibly drastic makes them change. By targeting the larger percentage you have a better possibility of having them become someone in the 20%. It must be used as a case by case basis though because in some cases the 20% might be so essential to the business that any loss of that group would be devastating.
ReplyDeleteI believe Lucie made some very interesting points regarding market-segment growth and the importance of first-time versus heavy users. I agree that the answer to this question is very situation-based.
ReplyDeleteThe question of whether to concentrate marketing dollars on the highly motivated customers or the other 80%, is highly dependent on the type of product/ service we intend to sell. First of all, are we selling a product or service? Does the product require a lot of learning and involvement like electronics? Is it a food brand that many shoppers would chose to switch for a cheaper store brand? The answers to these types of questions have implications on the influence direct advertising versus WOM marketing have on new users.
Some of our purchases will require an extended search. We will look to friends and family members more knowledgeable in certain areas rather than decide on a product due to availability heuristic. According to our last two blogs, in which our decisions were heavily dependent on our parents choices, there are certainly cases for which directly advertising to us, the other 80%, would not be very valuable. Our predisposed direction from our parents seems to outweigh much of what marketing tells us to do. These consequences, however, are not consistent across all advertising initiatives.
Thus, I do not believe there is one answer to this question. Whether advertising should be focused on the 20%, 80% or across both segments, is heavily dependent on what we are selling.
I agree with Megan that the principle is very dependent on the product/service that the marketer is trying to sell, as well as the channel they are trying to sell through; it’s very common for one product that has a particularly brand loyal group to have a totally different rationale for their loyalty than another group, even within the same product segment.
DeleteWhile in the past, much of this loyalty was driven by basic exposure to ads, or even just familiarity with the product through seeing their parents use it, nowadays marketers have countless more channels to go through to potentially reach (and hopefully create more highly motivated) customers.
In one example I read about, a company uses lead scoring to help identify and attract the “best” customers. Lead scoring assigns points to each customer based on the various items that they put in their basket, therefore giving the companies a simple way to categorize their potential basic customers from their “VIP” ones. The article argues that being able to identify these customers more quickly allows them to tailor a more personalized sales experience, even over the web, that encourages the customer to buy more and buy again. It will be interesting to see if in the long run, this kind of tactic (paying more attention to a select group based on fairly simple metrics) proves to be a lucrative way to increase business.
http://www.equities.com/news/news-headline-story?dt=2012-09-19&val=491560&d=1&cat=headline
After reading the above posts, and understanding why everyone has said what they said, I would argue that marketers should focus on the 80% of consumers that comprise 20% of their sales.
ReplyDeleteThere is one argument above that disproves my opinion and that is that the 20% that are the majority purchasers are better at marketing our product (WOM and usage) than we would be by marketing to the 80% that are not loyal. While this is a great argument, I would argue that marketing more to these people would not increase their loyalty or desire to share with others what/why they love.
On the other hand, if a majority of marketing is focused on the 80%, then our efforts will actually have measurable results. While it might not reach these people or convince them to buy or product, it HAS the OPPORTUNITY to directly increase sales. So even though it might not work, in my opinion it has a chance of success while marketing to the 20% will not have much of an effect.
As most of my classmates have stated above, marketers should most definitely focus at least some of their resources toward 80% of their customers, even if they only make up 20% of sales. I think that Tyre said it best by saying that these customers have the opportunity to increase sales. I think that this idea of opportunity can also be somewhat of a temptation for marketers, as the "what if" questions begin to arise. What if we had marketed more toward the 80%? What if we had directed all marketing toward our most loyal customers?
ReplyDeleteAdditionally, I think that it would be interesting to see what marketing research says about the 80-20 rule. In the past, which companies have succeed? And what are consumers' reactions to the idea of a business ignoring 80% of its potential customers in order to focus only on the brand's most loyal customers?
Companies have to ask “if we want to market only to the 20% that gives 80% of value, do we have a way of knowing exactly who that 20% is? And is it worth pursuing that information?” This question was more relevant before the technological advances in market research that have made it increasingly easier to make the distinction. With the ability to track people’s purchases, reactions to emails and website activity, companies are much more adept at distinguishing the 20%. Marketers’ pursuit of the answer to this question is probably one of the main driving forces behind development of these online mechanisms. Just because marketers can distinguish motivated target customers now, I am not sure that they should dismiss the other 80%.
ReplyDeleteI agree with most people about this topic; I think a company should focus at least some portion of marketing efforts on its entire consumer base. There is the risk of running inconsistent marketing campaigns in an attempt to appeal to multiple segments. Ultimately, as long as a brand remains consistent and true to its identity, I don’t think there is anything wrong with marketing to multiple segments. There are definitely disadvantages to focusing only on the 20% of consumers: they are probably already brand loyal, and companies could be missing opportunities to attract new buyers.
I find myself siding with the minority on this one. I believe that marketers should focus the majority of their time, money, and efforts towards marketing to the top 20% of costumers. Marketers should absolutely focus on the customers that bring the company the most revenue. We have to remember from the preface that, "Customers deliver dollars, and marketing delivers customers." In my opinion, marketers are tasked with delivering the most profitable customers to the company!
ReplyDeleteAt my internship this past summer, the company's current "sweet spot" or "top 20%" was restaurants. The company aggressively targeted restaurants, and was in the process of expanding their target market to another group within the larger 80% (e-commerce businesses). I do not advise that marketers completely ignore the remaining 80%, but rather that they pick a specific portion of that 80% that they believe they could turn into a profitable base. The company should spend the majority of their resources on the top 20%, but save some resources for new business development and for targeting a part of their 80% that they have not focused on before.
I completely agree with Emily here in that is in the company's best interest to focus the majority of their efforts on the top 20% of customers. It goes along with the belief that it is best and most productive to focus on your company's key strength and really develop that area as opposed to spreading yourself too thin and trying to do too much.
DeleteIf 20% of your customers are bringing 80% of your sales, then focus your energy on bringing more and more value to those customers. They are the driving force behind your company. I think the main reason you should target the top 20% is because they are most likely to be your brand evangelists, like we discussed in class. If they are that devoted to your product or service, they will go out and spread the word to their networks, particularly if you continue to deliver more and more value to them. This kind of word-of-mouth marketing is infinitely more valuable to your company than just spending more money on advertising to new customers.
Although I feel that marketers should target both the top 20% and the other 80%. I think that they should put the majority, say about 70-80%, of their marketing resources such as advertising and promotional budgets to their top 20%. These are the people that are continuously buying the brand and also act as the evangelists for the brand. Because they are brand loyal and therefore produce 80% of the sales for the brand, they are willing to advertise for the company without compensation. We have talked in class a lot about Apple. There are so many brand loyal customers of Apple that love to talk about how much better their IPhone or IPad is compared to the competitors. They advertise for the brand and help to promote the brand so that the company does not even need to spend much of its resources on the 80% of people who are not generating many sales for the brand. People trust the opinions of family and friends more than the brand and therefore will listen to what the loyal customer has to say about the brand.
ReplyDeleteA problem with loyal customers acting as the advertisers for the company is that they could basically say anything they wanted to about the brand. The company does not want consumers saying bad things about the company or lying to people about the products. Especially with the use of social media, companies should make sure that comments that are made about their brand are monitored in order to ensure that the reputation of the brand is safe.
I have to say everybody who has previously commented has made very excellent and valid points that I agree with. I specifically agree with Madeline where she states that “a company should focus at least some portion of marketing efforts on its entire consumer base.” 80-20 seems a little extreme to me and if I could “reinvent” the rule I would make it 60-40. Brands need to constantly go the extra mile to try to attract a new consumer base in order to keep up with competition and a rapidly changing marketplace. Yes, the already loyal consumers are important and should be advertised and marketed to, but they don’t need as much convincing. The challenge of gaining new consumers should be attractive to a brand!
ReplyDeleteIt is very crucial to get consumers involved with your brand. As we saw in the Grey Poupon Facebook advertising, all these new ways of using social media have a unique way to bring in new consumers. Consumers want to feel involved even if they aren’t necessarily your target or ideal consumer. After reading the chapter on Attitudes it is clear that many different factors can influence our decisions and influence our loyalty to brands which is what brands should be taking advantage of.
As we have talked about before the community aspect of a brand gives the brand a unique position for word of mouth marketing and peer pressure. This ties nicely to the 80-20 rule because these 20% of consumers are the strongest and most engaged segment. It only makes sense to allocate the majority of your resources to this group because they will show the most appreciation (sales) for the brand.
ReplyDeleteBy fully extending marketing efforts to this group are putting all your eggs in one basket with associated risk. This means that because this community is so set in their ways they are more likely to move in packs and feed off of one another. This idea is best known as cult branding and can be extremely successful, but could also lead to consumers being dissuaded by friends or the brand community.
I think it is most important to focus on the 20% of consumers that make up 80% of your sales. Some efforts could be taken to appeal to the other 80% of consumers, but it is most important to delight your current, most loyal customers. If a company does a good enough job of satisfying its current customers needs and exceeding their expectations, then the consumer will be so pleased and excited about the company that he will tell others about his experience. This word-of-mouth advertisement can help bring in other people who are not frequent consumers of the product. Also, you want to make sure that your most active consumers remain loyal to the brand, so you need to continue to find ways to delight them and appeal to them.
ReplyDeleteI think that Nicole's proposed 60-40 plan is spot-on. It is important for brands to both value their loyal consumers, but also reach out to new consumers. While many strong, loyal users can serve as ambassadors for the brand, not all brands have ambassadors. For example, I'm a consistent user of Kashi products. They are the only cereal that I eat. While I am a very loyal consumer, I do not openly advertise the brand to my friends and/or family. Because not all brand loyalist are ambassadors, I agree with Nicole that brands should place emphasis on reaching out to new consumers. Another underestimated process in the 60-40 model is how consumers are converted from new to loyal customers. How do brands push consumers to become loyal, if not habitual users of their products?
ReplyDeleteNot 100% have a need or a strong want for any product. The 20% of consumers purchasing 80% of the sales are considered brand loyal. These brand loyalists are not simply buying to fulfill a want or satisfy a need, but they might be convinced that they need/strongly desire to purchase the product the made by a particular brand. This can often make a customer equate a desired product as a need. Marketing to these consumers is necessary to maintain their confidence in the brand, but the 80% buying the 20% of sales are the tricky consumers to market to because they may be loyal to buying the lowest price or to another retailer in a different location, etc. In order to market to these consumers, we have to understand what made them buy and what keeps them from buying repeatedly. It is easier to market to the 20% buying the majority of sales and marketers need to keep these consumers where they are, but increasing consumer motivation to the non-loyalists is more time consuming and more expensive.
ReplyDeleteAs most people have pointed out, WOM from the loyalists is invaluable to marketers. The link below is a short article on “3 reasons why digital campaign ideas fail”- the three reasons being 1. Defining an idea too narrowly, 2. Believing that people want ubiquity, 3. Falling in love. These three all highlight that marketers are looking for one amazing campaign to cut across all consumers. It is important to find what commonality amongst the 20% buying 80% of sales brought the consumer to buy and kept them buying, because it is likely that that campaign or idea or cause is completely irrelevant to the lives of the remaining 80% and needs to be a small part of the next campaign to keep the 80%. These big campaigns likely tap into conscious needs, yearnings, and cravings, but the non-loyalists might be more responsive to these subconscious identifiers.
http://www.imediaconnection.com/content/32773.asp?utm_source=twitterfeed&utm_medium=linkedin&utm_campaign=Feed%3A+ImediaConnectionAll+%28iMedia+Connection%3A+All+Stories%29
I think this relates highly to the discussion we had regarding heavy users. There are many people out there whose minds are very hard to change. Your ROI will probably be higher of spent trying to influence other consumers. This predicament reminds me very much of politics. In this case (metaphorically) 80% of the votes come from 20% of the American population. Though these aren't the exact numbers, the same principle applies. We can consider these people the decided voters. Politicians don't spend too much of their time or marketing budgets trying to sway these people. As we discussed, it is much harder to change their minds due to confirmation bias, switching costs, etc. Politicians instead focus on the remaining 20% of votes coming from the remaining 80% of America. These people make up the 0-5% that can decide an election.
ReplyDeleteGoing back to consumer goods, you need to remain competitive in that remaining 20% of sales; that may be where you end up competing for the 0-5% of market share that distinguishes you from the next guy. That being said, you should not disregard the 80% either. You will still capture some share of their wallets if they are not already habitual, otherwise dedicated buyers. However, as politicians will agree, you won't win the race without those key swing voters.
In addition to some of the above comments, I believe that often times a company’s position and vision statement may incorporate both aspects of the noted customer segments. Regarding the 80-20 Rule, the 20% of established consumers must be kept happy with the product or service so as not to deter this strong section of sales. However, it is also important for a company to expand its consumer base while not losing sight of its values (those notions protected by both the company and the quality expected by consumers). The benefit, I believe, in aiming programs at the other segments (the 80%) is that marketers are increasing brand awareness exposure and hopefully increasing buyer motivation towards the product/service.
ReplyDeleteI agree with Lucie’s point and feel that it a vital part to the future of the company to maintain the vision of customer expansion in gaining more brand-loyal members. Such a forward-thinking and goal-oriented position is a positive stance for a company and its success. I think it’s also beneficial as a great internal motivator for the company to continue product/service innovation and creativity relating to adaptability in the changing customer needs.