Marketing and “The Pareto Principle”

Vilfredo Pareto was an Italian economist who observed that in most cases roughly 80% of the effects are the result of 20% of the causes, thus its better known synonyms the 80-20 Rule or the Law of the Vital Few. Pareto is a another member of my Marketing Pantheon, along with Benoit Mandelbrot (see “What A Mathematician Can Teach Us About Marketing”), and a few others that I shall introduce in later posts. Let me give you one example of how Pareto applies.

When I was with Intrawest, I accompanied the EVP to look at a new Napa Valley resort then in the early stages of development. The developers had a brilliant, innovative idea for a Private Residence Club, and they were looking for an investment and strategic partner, thus the Intrawest visit. They showed us around; then gave us an impressively thick bound book, the marketing plan for the resort. It was my job to review the plan and report. Rarely had I encountered a more weighty and comprehensive plan, nor one as misguided in its essential focus.

The plan presented all data available at the time on Napa Valley visitation, who the tourists were and where they came from, real estate prices, etc. I’m simplifying here from memory, 65% of tourists came from the immediate Bay Area, 20% from southern California (L.A. market), 8% from New York, 3% from Chicago. Consequently, the recommendation was to open sales offices in San Francisco, L.A., New York and Chicago, and allocate funding (the Sales & Marketing budget) along the lines of visitation, with most going to the Bay Area, but proportionate amounts to the other metro areas.

Of course, the result of such strategy would mean at least one location, salesperson and admin in Chicago, with proportionately more staff and bigger offices in the larger markets of New York and L.A., plus offices in the Bay Area. Then, of course there is advertising, direct mail, promotion, etc. to be considered for each location. And, all has to be overseen and managed. To my mind this was a complicated recipe for waste, delay and risk of failure.

I was not familiar with Pareto at that time, so I didn’t express my critique in the language of The Vital Few. I did so with a baseball analogy:

All of the budget should focus on the Bay Area, and specifically the Bay Area’s high-end targets/communities, because this is The Get Home Market. If the development wins against this market, it reaches home plate, scores, and wins the game. If it is not successful in this market it cannot possibly win the game!

What I referred to as The Get Home Market Pareto long before had described as The Vital Few. Every enterprise has its “vital few upon which success is dependent, and without which it is unattainable. In the case described above the vital few were defined by geographic criteria; that is just one filter that may apply depending upon the case. A marketer’s job is to determine and apply the filters, define the particular vital few, then to focus all efforts without distraction.

Incidentally, nobody in recent history was better at this than Steve Jobs. Jobs instinctively knew that Apple had an inner core of believers, early and fervent converts that would zealously keep the faith and spread the word, as long as he remained true to Apple’s founding tenets. He did so with intense focus on producing a seamlessly integrated family of a few fabulous products elegantly designed (with a minimum of buttons); and, then building gorgeous temples to showcase these creations. He understood well that this extraordinary purity would create near religious veneration among an “inner circle”* vital to Apple widening its appeal.

*More on the “inner circle” and Core-Centric Marketing© in a future post.

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