Internet Business is killing the 80/20 rule

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.

A new article over at Inc.com takes this research and expands the view of how the marketplace is changing with the blurring trend of the 80/20 rule. The article at Inc.com is titled, “A World Without Bestsellers - Niche Markets, The Long Tail, E-Commerce.” This detailed look at a wide array of businesses that are trying to take advantage of the Long Tail is quite an eye opener. One company, Niche Retail based in Sylvan Lake, Michigan that was featured in the article actually bases their entire business principles in exact opposite of the 80/20 rule. Niche Retail has taken the long tail by the horns and developed 25 specific stores online that focus on very tight niches of products like jogging strollers. One of the owners of Niche Retail simply stated in his interview with Inc.com that, “To me, the 80-20 rule is dead. The public is demanding choice, so it doesn’t make sense to train employees on only a few products.”

It’s predicted in this article that we should eventually expect Wal-Mart, Target and other central retailers to eventually roll out top 20 products at a discount. As soon as this move is made widespread it is imperative that people are actively participating in the long tail market in their businesses to be able to survive.

Another case study covered in the Inc.com article highlights new principles showing in online businesses like at SkinStore.com. Skinstore.com says that out of all of their products their rule works out to be about 30 percent of their product line accounts for 35 percent of all the online sales. This pushes very far from the Pareto Principle so widely used in big and small businesses across the world. Another online Pareto Principle killer is at Zappos.com where they’re statistics show that 20 percent of the top products create about 50 percent of the company revenue with the bottom 80 percent creating the other 50 percent.

Even though we can happily look at life around us and see the Pareto Principle working out in simple fashion you have to note that all good things must come to an end. As the Internet changes our lives in many ways it’s also changing the way we do business and the way we purchase things. Don’t worry, you can still count on 80% of your peas coming from 20% of those pods unless you’re using some really bizarre fertilizer.

If you run an Internet Business and you’ve seen the disappearing 80/20 rule in your sales data we’d like to hear from you. We’d also like to hear from people that still see the 80/20 rule in their lives, business and personal. If you see the 80/20 rule appearing or disappearing in your life and want to talk about it tell us your story.