Vilfredo Pareto was one of life’s more observant characters. In 1906 he noted that approximately 80% of the land in Italy was owned by 20% of the population.
This general observation, that, for many events, roughly 80% of the effects come from 20% of the causes, went on to become known as the Pareto Principle, or the 80/20 rule.
It is good fun to see how and where this applies. You probably wear 20% of your wardrobe 80% of the time. You probably use 20% of the apps on your phone 80% of the time and at the most you probably call or message 20% of your phone contacts 80% of the time.
The ratio has been used to promote improvements in areas as diverse as corporate productivity, personal effectiveness and even happiness.
In business management, it went on to be observed that approximately 80% of sales come from 20% of customers.
Look closely at UK media agency land and one sees approximately 80% of billings concentrated in just under 20% of the Top 100 ranked media agencies (yes, there are that many agencies!)
The Pareto Principle seems to be all around us. Except, it would appear, in FMCG.
Is FMCG the exception to the Pareto Principle?
Byron Sharp’s book, How Brands Grow, provides panel-based evidence to suggest that FMCG brands and categories do not follow anywhere near "the proverbial" 80/20 rule and that over one year the true figure is "usually not far off 50%".
Furthermore, it states that brands within a category have a similar Pareto share.
This "law" is one of the core principles that goes on to underpin the rationale to focus resources so ruthlessly on mass marketing in order to reach the light buying majority.
But why should FMCG not fit more closely with Pareto? We decided to investigate.
As we detail in our report, Mass Marketing or Tailored for your Tribe?, seven FMCG categories were selected at random.
The data crunched was absolute sales data covering 200 million transactions from a large, nationally representative UK retailer with high market share across a continuous five-year period (2011-2016) and representing 800,000 regular customers.
The challenge that many face when conducting research into FMCG is that the majority of shopper panels of reasonable size churn every couple of years and furthermore, may struggle with small brand sample sizes.
We are privileged to be able to access a panel drawn from a loyalty-card base with low levels of churn.
Although the shopper behaviour may be skewed in favour of the retailer, this does not skew the brand or category level behavioural view within the retailer, since all purchases are rewarded equally.
The data therefore provides a robust view of purchase behaviour from a large sample over a seldom viewed extended timescale.
Heavy buyers matter
The results were clear: The majority of brands analysed were closer to Pareto (80/20) than the How Brands Grow view.
The average spend attributable to the top 20% of customers across all brands tested was 69% and 76% over one and five-year periods respectively.
Furthermore, and in contrast to How Brands Grow, market share brand rank consistently made a big difference.
The smaller the brand, the higher the observed Pareto score, meaning smaller brands are much more reliant on sales from their heaviest customers.
Strip out the market-leading brands across all categories and the overall average Pareto score for the remaining smaller brands was 78%.
So, what does this all mean? The research revealed FMCG categories have one thing in common: heavy buyers, of even the biggest brands, contribute more towards total sales of a brand than is commonly believed (see chart below).
As would be predicted, over a longer time-period the significance of consistently heavy buyers increases, relative to the long tail of light buyers and despite the law of buyer moderation accounting for some natural churn between buyer types.
The implication, therefore, is for a more balanced marketing approach with a segmented strategy based on buyer behaviour that considers both acquisition and retention of a brand’s most valuable customers.
The findings also reveal that bigger brands, as ranked by market share, have a lower Pareto share than smaller brands.
It is possible that the natural monopoly law (larger brands having a relatively higher proportion of light category buyers) is partly causing this phenomenon but further research is required to fully unpick the brand versus category behavioural interaction.
The fact that Pareto scores increase so significantly for smaller brands could suggest that brand differentiation and preference may be more prevalent and successful than generally assumed.
Of course, the rub may be that smaller brands are unwittingly restricting their potential rate of growth as they attempt the journey from "niche" to "mainstream".
Finally, significant differences between categories and their Pareto "footprint" suggests the need for FMCG marketers to more fully understand the drivers at both category and brand level to optimise their plans.
FMCG categories, just like people, have very different personalities. Some are routine, driven by habit and need.
We all need to buy staples such as bread, perhaps explaining a much lower Pareto score of 57% for the market leading brand.
We’re not as fussed about the brand of bread so long as it’s the right type (white, brown, sliced etc.) and the kids will eat it.
Some categories though are exciting, a little bit naughty, emotional and even addictive, driven by a world of impulse, discretion and choice. Every chocolate category brand, for example, revealed a Pareto score over 75%. You know the chocolate you like, the choice is tantalisingly selfish and you certainly won’t settle for anything less than your favourite treat! Do product attributes and brand preference become more important when self-reward is involved?
What next for brands?
As we move in to 2018, hopefully a further debate will spark to add new voices, greater nuance and examples of practical application around empirical marketing "laws" such as Pareto.
For example, if heavy buyers are the most habitual and do not need to be reached or engaged because they’ll find you and keep buying until "something momentous happens" as Sharp argues, is it still appropriate to ignore them as a specific group, seeing their true proportion and value increasing so significantly over time?
The fact that the majority of a brand’s sales come from a relatively small group of customers will naturally spark further questions in the intelligent marketer’s mind.
For example: Who are these customers? Are they really "just like your competitor’s customers" or could they be particularly attracted to something differentiated in my brand’s messaging?
How do I try to retain more of them for longer to protect against competitor activities? How do I best use them as brand advocates?
Our empirical observations paint a picture to which How Brands Grow states if true would make mass marketing at the expense of all else make a lot less sense. We are happy to be empirically challenged and expect to be so.
Whilst the research focuses specifically on brand buyer distribution only and does not attempt to offer growth strategies, we will be conducting further analysis in 2018.
In the meantime, what patterns do other retailers see in their sales data?
Let’s hear more from the brands that have shifted (back) to a singular world of mass marketing these last couple of years. Has anyone seen a step change in brand growth as a result?
|Adam Smith, head of media strategy at Dunnhumby, and Nick Blair, data science manager at Dunnhumby, are the authors of the report, Mass Marketing or Tailored for your Tribe?|