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Pareto principle (80/20 rule)

The Pareto principle is the rule of thumb that a small share of causes, such as a few products, accounts for most of the results.

How it works

The name goes back to the economist Vilfredo Pareto, who noticed that a small share of people held most of the wealth. In the early 1950s the quality expert Joseph Juran described it as a universal principle and called the two groups “the vital few” and “the useful many”. 80/20 is shorthand: the two numbers are a share of products and a share of sales, so they need not add up to 100.

Ad spend is more concentrated than 80/20. In our study of 1.4 million products, the top 10% of products took a median 68.1% of a store’s ad spend, and the top 1% took 27.7%. Across the whole sample, only 7.9% of products sold at all in 13 months, and they took 78.1% of spend: closer to 8/78 than to 80/20.

Formula

Revenue of the top X% of products ÷ total revenue, with products ranked by revenue

Example

Example store, not client data.

The tableware shop has 3,000 products and made 180,000 last month; 220 products sold. The top 44 sellers by revenue, 20% of 220, brought 99,000: 99,000 ÷ 180,000 = 55%. Against the whole catalogue, the top 20% is 600 products, which hold all 220 sellers and so 100% of revenue.

Not to be confused with

  • ABC analysis — a method that sorts products into classes A, B and C by their share of revenue. The Pareto principle is the observation behind it.
  • Long tail — the far end of the ranking: many products with one or two sales each, which together can bring a large share of revenue.

Right and wrong readings

  • Wrong: “Most products barely sell, so switch them off and keep the budget on the top 20%.” Right: in the same study, 35.4% of products that had spent at least the cost of a conversion without a sale converted later, after a median of 2 months. Of bestsellers, 71% stayed in the top for no more than 3 of 13 months. The principle describes where results sit now, not which products sell next.
  • Wrong: “The top 10% take 68.1% of spend, so they bring 68.1% of sales.” Right: that is a share of spend: where the budget went, not what those products earned.

Sources