The Pareto Principle vs. The Long Tail Theory: Heads or Tails?

#Cool stuff

Are there hits among the low demand products?

The Pareto Principle  states that roughly 80 percent of the effects come from 20 percent of the causes. This theory was named after Italian economist Vilfredo Pareto. He published a study in 1896 to prove that 80 percent of the land in Italy is owned by 20 percent of the population. Pareto started to work on this theory after discovering that only a small percent of the peapods contains the vast majority of the peas in his garden.

Since then, his principle has been used as a rule of thumb in many fields besides agriculture. Microsoft discovered that by correcting 20 percent of the most reported bugs, they could eliminate 80 percent of the related crashes. It helped business owners to realize that in many cases, 80 percent of the sales comes from 20 percent of the shoppers, and by concentrating on their most loyal customers they could increase their income significantly.

While it would seem a logical conclusion that a small percent of the products account for the majority of the sales in e-commerce sites, this is questionable, at least.

Chris Anderson, former editor in chief of Wired magazine, 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 best sellers and blockbusters.

“In virtually all markets, there are far more niche goods than hits. That ratio is growing exponentially larger as the tools of production become cheaper and more ubiquitous. The costs of reaching those niches is now falling dramatically. Thanks to a combination of forces including digital distribution, powerful search technologies, online markets are resetting the economics of retail,” he wrote in his 2006 book “The Long Tail: Why the Future of Business Is Selling Less of More.”

While Anderson examined this phenomenon mainly in connection with e-commerce and popular culture, similarly to the Pareto principle, the long tail theory has been used to explain other processes than it was originally intended to.

His book has become highly popular among online marketers and SEO experts. The term “long tail keywords” now refers to longer phrases that consumers use when looking for specific pieces of information. Most experts believe that targeting them in a highly competitive environment is more beneficial for website owners than aiming for the more popular short terms since it is easier to attract the same number of potential clients this way.

At this point, you are probably not going to be surprised by the fact that the most popular shorter terms account for roughly 20 percent of all US searches.

tails with spikes

Image Source

Tails with spikes

I started to write this post because I’ve read about both the long tail theory and the Pareto Principle, and I felt that on the surface they contradict each other. If I follow the 80/20 rule, I should aim for popular terms instead of the more specific searches, and advertise only the most important products in a webshop. Which, of course, didn’t feel right.

I started to wonder how could two theories that are well-known and popular among marketers suggest doing exactly the opposite?

While I still don’t I have a perfect answer for this question, this is what I concluded.

Theories are not meant to describe every specific use case you can connect them with. Actually, neither the long tail theory nor the 80/20 rule is able to predict the effects of online shopping precisely.

Douglas Rushkoff, American media theorist and a contributor to The Guardian and The New York Times, examined how digital distribution changed the creative industry in his 2016 book “Throwing Rocks at the Google Bus.”

He noticed that a few blockbuster hits make up a greater percentage of all the music sold than ever before. In the days of physical albums and CDs, the industry rule was that about 80 percent of sales came from the top 20 percent on offer at the moment. Today on iTunes, the bottom 94 percent sell fewer than 100 copies each. So, in this case, instead of giving an opportunity for less popular artists to find new audiences and make money, a new digital platform did exactly the opposite of what Anderson predicted.

And it is very likely that you could find other industries, too, where the numbers won’t support the theories. But it doesn’t matter.

They are not important because they are universally applicable to anything you can come up with. They are powerful because their underlying ideas helped a lot of people from different professions come up with new ideas and look at things from different perspectives.

And maybe they don’t contradict each other after all.

The 20 percent of the 80 percent

Image Source

The 20 percent of the 80 percent

Perry Marshall, online marketing strategist and the author of “80/20 Sales and Marketing,” believes that the Pareto Principle is exponential. Among the best customers, there is another twenty percent. This very small number of clients can represent 64 percent of your overall sales.

This got me thinking. If the 20 percent could have an inner 20 percent, why can’t the same be said about the 80 percent? In other words, are there hits within the long tail?

I’m pretty sure that they exist. I’m thinking about products in e-commerce sites that bring a much higher revenue than what was expected of them. The ones you didn’t advertise, or spent too much time in introducing, but did extremely well, considering the amount of work you put into their success. Or blog posts that you wrote without paying attention to SEO, or researching the topic, but in the end became one of your most popular articles.

So, what do you think? Did you have similar experiences? Do you also see that 20 percent in your 80 percent? Can you identify it? Or is it just 42?

#sharingiscaring 😉

by Sáfár Attila
on Tuesday, September 6, 2016

Be the first who reads our next article!

Weekly selection of the best personalization, business intelligence and conversion optimization articles.

It's time to check your inbox! ;)

In order to continue, you have to accept our legal conditions.

If you want to sign up without facebook, you have to provide an email address.

With subscribing on our weekly newsletter you are agreeing to the Terms of Use and Privacy Policy.