WHAT ARE THE IMPLICATIONS OF THE 80/20 RULE FOR ECOMMERCE? As a whole though, the 80/20 rule seems to be broadly applicable to eCommerce marketing as the bulk of both sales revenue and profitability tend to be driven by a small subset of sales channels, ad variations, and marketing strategies. Many successful dropshippers seem to at least implicitly understand the 80/20 rule as evidenced by their never ending search for winning products, copy, and creative – all three of which are needed for effective (and profitable) scaling. At IronLinx, we actually structure picking and packing for our customers based on the 80/20 rule – with the fastest-moving SKUs placed closer to packing areas (to reduce handling time) and periodic re-evaluations conducted to re-optimize as things change over time. Interestingly enough, eCommerce sales revenue and profitability both tend to be disproportionately driven by not only a select group of customers, but also by a select number of unique product offerings (SKUs) – though, again, the rank orderings of SKUs by sales revenue and profitability don’t always overlap. Beyond sales revenue, the 80/20 rule also seems to hold up well when it comes to customer profitability – though the respective rank orderings of the largest and most profitable customers don’t always fully overlap (this is an important point – more on this later). On the business-to-consumer (B2C) side of things, these key customers are similarly easy to identify – they tend to buy frequently, spend greater amounts of money per order, and are likely members of rewards and/or other VIP-based programs. On the business-to-business (B2B) side of things, these key customers tend to be easily identifiable – they often number five or fewer and both individually and collectively carry a vastly disproportionate load of the total sales revenue of a typical eCommerce business. Management and marketing experts have long been aware that 80% (+/-) of sales tend to come from 20% (+/-) of customers however, neither the nature nor the importance of the relationship appears to be widely recognized by practitioners. In eCommerce, the 80/20 rule has a tendency to (roughly) show up in several core areas: HOW DOES THE 80/20 RULE APPLY TO ECOMMERCE? Such distributions appear to be widely applicable in both the physical and social worlds: from physics and biology to economics and finance. Mathematically, the 80/20 rule takes us away from the comfortable confines of normal distributions (with their perfectly symmetrical bell curves) to the heavily-skewed world of power laws (often referred to as “Pareto distributions”). The so-called 80/20 rule (commonly referred to as the “Pareto principle”) holds that 80% of observations tend to be driven by 20% of causes. What are the implications of the 80/20 rule for eCommerce?.How does the 80/20 rule apply to eCommerce?.In this post, therefore, we explore the following: Throughout life, outcomes appear to be disproportionately driven by a surprisingly small number of inputs or causes.
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