The 80:20 rule is more than a common concept. It is formally known as the Pareto principle.  An Italian economist, Vilfredo Pareto, developed the principle by observing that 20% of the pea pods in his garden contained 80% of the peas. He applied this observation to land ownership and in 1906 found that 80% of the land in Italy was owned by 20% of the people. The Pareto principle states that roughly 80% of the effects come from 20% of the causes. In sales, we translate that to 80% of our revenue comes from 20% of customers. Analyzing the 20% then becomes a very important thing. With online marketing and the web’s influence, we tend to focus on buying behaviors or information search patterns in the virtual world. Too often those of us working with the Internet and IP technology forget there are real world analytics performed every second of every day. This was brought to my attention with a resounding blast yesterday.

Yesterday, I arrived home and on my desk was a note to call my credit card company because of unusual charge patterns. To be clear, I carry very little cash. I charge nearly everything and pay it off at the end of the month. This results in charges of both small and large amounts all over the country and internationally, therefore never has a call from my credit card provider been on target for fraud, until yesterday. The amount was an underwhelming $1.20. There was an attempt to use the card at a beverage machine in Houston, Texas. The problem this particular thief encountered was he/she was using a card that expired December 31, 2011. Whoops! Clearly, a financial institution needs to monitor financial transactions to minimize loss. However, in this case it also gives the customer, me, additional confidence to maintain my business with this particular provider.

Okay, back to the 80:20 rule. If you have a data mining system that can analyze your customer’s purchasing patterns, then perhaps you can target your marketing efforts to push those particular products or services that attract the 20% of users who generate the 80% of revenue. Furthermore, you are able to avoid spending your time with the 20% of your customers that generate 80% of complaints, or the 80% of products that comprise only 20% of sales. While I cannot be specific about the actual algorithm employed by the Broadvox NOC to monitor for fraud, it can be noted that it too has a relationship with the 80:20 rule.

The Pareto principle can be applied to many situations and can lead to structural changes in how a business operates, hires or creates new products. However, analytics, whether addressing the physical or virtual world, should be used as a data source not as a decision tool. I do not use the 80:20 rule when I receive a customer complaint. If a complaint reaches me, it is handled. I do not base my involvement upon the size of the account. Yet, I fully realize that any business has to manage its customer service by addressing the needs of the 20% that generate the most profits with more personalize attention.

Data mining and analytical tools should be used to assist in determining what actions are best for the business. This can result in establishing new processes and the elimination of others, marketing programs that generate a dynamic sales increase while requiring minimal investment, or improving the loyalty of key customers as you maintaining the business of the rest. We perform customer analytics to identify our top 20%, middle 60% and bottom 20% customers. Consequently, we can establish priorities for every action of our business based upon where our customers place.

More on this next week.

Enjoy the weekend and I promise another new recipe on Monday!