What Is the 80/20 Rule of Marketing?

The 80/20 rule of marketing is derived from the broader Pareto Principle concept introduced by Italian economist Vilfredo Pareto in 1906. Pareto noted that the majority of wealth in a free market economy is concentrated within a relatively small group of people -- roughly 20 percent of the population. This principle has since been applied in a number of business and resource allocation methods, including marketing.

The 80/20 rule has a few marketing-related applications. One application relates to how money is spent on advertising and other marketing campaigns. In general, 20 percent of marketing messages produce 80 percent of your campaign results. Understanding which of your investments produce the greatest results lets you eliminate some of the costs associated with less productive techniques. This improves your marketing efficiency and returns.

From a product perspective, 80 percent of a typical company's revenue is derived from 20 percent of its products or services. These products are sometimes referred to as cash cows since they drive much of the business' results. You can utilize this awareness in a couple ways. You can emphasize the value of your core products in a better way to target customers. You can also expand your business by targeting new customer groups that have the most impact on products and services.

One of the most useful applications of the 80/20 rule in marketing relates to profits. A typical business earns approximately 80 percent of its profits from the top 20 percent of its customer base. This knowledge enables companies to focus on maintaining relationships with these top customers. Loyalty and frequency programs are intended to offer the best value and experiences to customers who provide the best results.

The customer pyramid approach is a way to expand on the Pareto Principle and further break down your customer base for business efficiency. At the top of your pyramid is the platinum level, or the top 20 percent of customers. Just below are the gold customers. In a highly profitable company, gold customers also contribute to profits and might eventually become part of the core group. Getting them engaged in loyalty programs is helpful. The next tier, the silver group, may or may not include profit-generating customers. These are more cost-conscious customers, so the key to retaining them is to provide basic services at minimal costs. The bottom of your pyramid are the lead weight customers. These customers are typically unprofitable. They demand time, resources and services, but are unwilling to pay for them.