lonelysoldier1
VIB
Simply put, the 80/20 Law states that roughly 80% of the effects are a result of only 20% of the causes. The 80/20 Law (also known as the Pareto Principle), originated in 1906 when economist Vilfredo Pareto observed that 80% of the land in Italy was owned by 20% of its population. Since its inception, people have applied the principle to topics ranging from why people cheat in relationships to sales techniques.
Before going into applications of the 80/20 Law, it’s important to clear up that the the principle is far from an all-encompassing law governing the universe. For example, in terms of internet content, the ratio might be skewed towards 99/1, while a bell-curve distribution is prevalent among other forms of distributions in the world. Instead, the principle focuses on the fact that the majority of outcomes are the results of a minority of the causes.
Now that we’ve gotten that cleared up, let’s take a look at how the 80/20 law is applied to business today.
The majority of your revenues come from a few of your products.
For example, AT&T ran into this problem after becoming the exclusive wireless carrier to offer the iPhone in the United States. Although the iPhone is one of the most popular smartphones today, the array of Android, Windows Phone, and other smartphones on AT&T’s network dwarfs the amount of iPhone users, exemplifying the 80/20 ratio.
Since then, data usage has skyrocketed, growing 8,000% between 2007 and 2010. This single-handedly caused a disproportionate amount of dropped calls and slow data connections around the New York and San Fransisco areas, forcing AT&T to consider tiered data plans to segment its users and free up network space.
According to Mark Siegel, spokesperson for AT&T, “The tiered data plans will meet the needs of the overwhelming majority of consumers. A lot of people think they’re heavy users, but they’re not.” The segmentation of customers makes business sense, as all intermediate economics textbooks will preach the fact that undefined property rights (in this case, unlimited data usage), leads to free riding and overconsumption. Only through clearly defining property rights (setting tiered plans) will consumers pay for their actual usage.
The majority of your business will come from a small proportion of your customer base.
There are several types of consumers in this world. There are the die-hard fanboys who will camp outside of a store at 3 in the morning just to be in line to receive a product on opening day. There are the regulars who will consider you product, but choose among others to make an “informed” decision. Finally, there are the bargain hunters who will only buy from you given a huge discount.
The 80/20 rule stipulates that companies should focus mainly on the 20% who contribute most to revenues , then commit their efforts to swaying the decisions of the other 80%. An example of this is when Apple reduced the price of their iPhone from $599 to $399 two months after the product launched. Realizing that it neglected the early adopters, the small customer base providing a disproportionate amount of revenue with the price drop, Steve Jobs wrote an open letter to them announcing a no-strings-attached $100 rebate to iPhone buyers before the price drop
Before going into applications of the 80/20 Law, it’s important to clear up that the the principle is far from an all-encompassing law governing the universe. For example, in terms of internet content, the ratio might be skewed towards 99/1, while a bell-curve distribution is prevalent among other forms of distributions in the world. Instead, the principle focuses on the fact that the majority of outcomes are the results of a minority of the causes.
Now that we’ve gotten that cleared up, let’s take a look at how the 80/20 law is applied to business today.
The majority of your revenues come from a few of your products.
For example, AT&T ran into this problem after becoming the exclusive wireless carrier to offer the iPhone in the United States. Although the iPhone is one of the most popular smartphones today, the array of Android, Windows Phone, and other smartphones on AT&T’s network dwarfs the amount of iPhone users, exemplifying the 80/20 ratio.
Since then, data usage has skyrocketed, growing 8,000% between 2007 and 2010. This single-handedly caused a disproportionate amount of dropped calls and slow data connections around the New York and San Fransisco areas, forcing AT&T to consider tiered data plans to segment its users and free up network space.
According to Mark Siegel, spokesperson for AT&T, “The tiered data plans will meet the needs of the overwhelming majority of consumers. A lot of people think they’re heavy users, but they’re not.” The segmentation of customers makes business sense, as all intermediate economics textbooks will preach the fact that undefined property rights (in this case, unlimited data usage), leads to free riding and overconsumption. Only through clearly defining property rights (setting tiered plans) will consumers pay for their actual usage.
The majority of your business will come from a small proportion of your customer base.
There are several types of consumers in this world. There are the die-hard fanboys who will camp outside of a store at 3 in the morning just to be in line to receive a product on opening day. There are the regulars who will consider you product, but choose among others to make an “informed” decision. Finally, there are the bargain hunters who will only buy from you given a huge discount.
The 80/20 rule stipulates that companies should focus mainly on the 20% who contribute most to revenues , then commit their efforts to swaying the decisions of the other 80%. An example of this is when Apple reduced the price of their iPhone from $599 to $399 two months after the product launched. Realizing that it neglected the early adopters, the small customer base providing a disproportionate amount of revenue with the price drop, Steve Jobs wrote an open letter to them announcing a no-strings-attached $100 rebate to iPhone buyers before the price drop