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Long Tail vs. 80/20 Rule
Two popular marketing principles are at odds
-- which principle applies to your product or
service?
Marketing is the process of planning and executing
the conception, pricing, promotion, and distribution
of ideas, goods, or services in order to create
exchanges that result in attention for specific
products or services. There are two common principles
or rules in marketing. The first is the "80/20
Rule", the other is the "Long Tail Theory", and
both appear to be at odds. As a marketer, it is
important to focus energy in order to maximize
marketing efforts. Determining which principle
works best for your business can be a challenge.
Marketers work hard to develop strategies and
tactics to identify, create, and maintain satisfying
relationships with customers that will result
in the best value.
Understanding the Principles...
80/20 Rule
The 80/20 Rule means that 80% of your business
or sales will be generated from 20% of your customers.
Or in other words. 20% of your efforts or customers
are responsible for 80% of your businesses' revenue.
This principle was recorded as "vital few and
trivial many", meaning that 20 percent is vital
(or critical) while 80% is trivial. The principle,
of course, can be applied to a number of different
things, but it is most often applied to businesses.
Long Tail Theory
The Long Tail Theory is a concept that somewhat
counters the golden 80/20 Rule. The Long Tail
Theory is derived from Pareto's thinking that
low demand can effectively and collectively make
up a market share that exceeds the few of those
that are in high demand. What this means is that
in aggregate, all the small customers exceed in
volume the popular volume. In the Long Tail phenomenon,
the trivial in mass out-perform the vital, making
the vital insignificant and the insignificant
vital. In other words, a large number small customers
can potentially out-perform a small number of
large customers.
Which is true for your business?
Determining which principle is in play in a specific
business is not difficult -- simply look at the
sales numbers and determine where the revenue
is coming from: the few, or the many. That said,
just because one model is in play, does not mean
that it is the best model for your business. It
may just mean that you have concentrated your
marketing efforts in one area, rather than the
other.
The old adage about having all the eggs in one
basket indicates that perhaps the Long Tail Theory
will sustain a businesses stability better than
the 80/20 Rule. For example, if you rely on only
a handful of customers for the bulk of your business,
and something happens to any one of those customers,
your business can be significantly impacted. On
the other hand, if you rely on a great many customers
for the bulk of your business, the loss of any
one single customer will likely not impact your
business in any significant way.
It is also important to keep in mind that the
80/20 Rule is a Golden Business Rule, while the
Long Tail Theory is a theory that has been proven
in only a handful of businesses (i.e. Amazon,
eBay), and as a principle it may not be suited
to all types of businesses.
By critically evaluating sales figures and understanding
these two popular marketing principles, small
businesses can experiment and focus their efforts
in a manner that makes the most sense.
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Long Tail vs 80/20 Rule