Definition

Pareto share is a measure of the concentration in purchase weights. It is usually expressed as the proportion of sales that come from a brand’s top 20% heaviest buyers.

When buyers all buy at similar rates then concentration is low (reaching a minimum of 20% of buyers accounting for 20% of sales or 20:20). When purchase frequency varies between a few heavier buyers and many very light buyers then concentration is high (reaching a maximum of 99:20).

In marketing, the Pareto law (or 80:20 rule) is widely interpreted as 80% of sales and/or profits coming from the top 20% of a brand’s buyers.

Key Findings

• Is there really a Pareto law? The answer is yes.
• Is it correct to represent it as 80:20? The answer is no.
• For brands, most regularly 20% of customers account for around 60% of purchase occasions, not the 80+% widely assumed.
• Category buying, follows the same pattern, i.e. the top 20% of buyers account for about 60% of category sales.
• The observed Pareto share will depend on the time frame chosen for analysis and the purchase rate of the category.
• Pareto share is not static over time, but will gradually increase as purchase occasions increase. Generally it reaches a plateau for frequently purchased categories at around 12 months.

Best Practice

• The law-like nature of the 60:20 Pareto pattern means the concentration of the customer base is not a consequence of marketing strategy. It’s not something you can, or should seek to, change.
• The fact that the Pareto share is less extreme than usually portrayed means that marketing strategies that are highly skewed towards heavy buyers should be avoided.
• Some strategies geared towards improving a brand’s Pareto share advocate dropping (“firing”) very light buyers. Other strategies include finding more heavy buyers or working to improve the value of light buyers. These too should be avoided.
• For brands managing their customer base a focus on the top 20% will result in a large amount of a brand’s sales potential being neglected.
• It is easy for the uninformed analyst to calculate Pareto share in a misleading way. Therefore when comparing Pareto shares, pay particular attention to the time frame/purchase incidence, the unit of analysis and how non-buyers are treated.