Vilfredo Federico Damaso Pareto, the famous nineteenth century economist, noted over a century ago that about eighty percent of the land in Italy was owned by twenty of the population.
He wasn’t some crazy wild eyed scientist. Over the next fifty years, this ratio proved out to be true for numerous events. For example:
It doesn't always work out to a perfectly clean number, but overall, roughly eighty percent of the effects come from twenty percent of the causes. This ratio evolved into something called the law of the vital few, aka, the principle of factor sparsity, aka, The Pareto Principle.
It’s something every retail brand can leverage to drive growth revenue.
Recently while preparing one of our strategic planning sessions, I decided to run an 80/20 analysis for one of our client’s customers and products. As an accounting major in college, my curiosity couldn’t contain itself.
The top 30% of products made 83% of revenue
The top 30% customers made 70% of revenue.
The ratio proved out. Not perfectly 80/20, but close enough.
Today, we’re going to explore the implications of this principle from a strategic, tactical and operational perspective. You’ll learn how to use the 80/20 to reverse engineer your advertising campaigns for maximum performance.
It’s critical to recognize which products are performing well and double down on the top sellers. When we first discovered for our client that the top 65 out of 217 products in 2018 generated 83% of total Shopify revenue, there was no question in our mind how to structure our campaigns going forward.
By utilizing this data we now knew which products to feature in our ads that would generate the most optimal performance.
Do you know your top selling products at any given time? Do you have powerful ad creative for each of them? And are you focusing your campaigns on those products versus newer, lesser known items?
If not, there’s still time. But as a retail brand, you have to knock where the door is already open. By running your data and identifying your top sellers, you have a good chance of running ads that customers are interested in. Put that 80/20 principle to work from the very beginning of your planning phase, and you’ll increase the chances of conversion.
Just because a company knows what their top selling products are, doesn’t mean they will feature those products in their ads. It’s imperative that those items are not only in the ads, but designed in a way to draw attention and maximize conversions.
Unfortunately, some brands think that can make their lower performing products successful by pushing ad money behind it. Maybe because of the need to clear out old inventory, maybe because of the desire to keep their product offerings fresh, it’s hard to tell. There are numerous reasons. The problem is, those ads with low selling products tend not to perform well. Even if they’re beautifully executed.
What we tell clients is, focus on top sellers and push those products. Make sure your top performers, aka, the eighty percent revenue generators, come first before you focus elsewhere, aka, the twenty percent revenue generators.
After using this principle in my clients’ ad strategy, the new ads which featured top selling products quickly became top performers. In one particular case, we already had one of the client’s best sellers in a Facebook carousel ad (that also featured other products). But when I decided to switch it to an ad that solely featured that one product, results exploded.
The last issue worth exploring has wider organizational implications. We’re referring to the high correlation between inventory and performance, as referenced in the above list.
A mini case study comes to mind. One brand we worked with was sixty percent out of stock. And yet, all of their metrics were incredible. Except for the one that mattered most, which was conversion rate. Meanwhile, they were busy launching whole new line of products, losing sight of their key issue.
We weren’t surprised that performance was weak. You can think of conversion rate issues like a leaking bucket or leaking funnel. You can get all the site visitors you want down the funnel, but if that bucket has a hole in it, those visitors that you put in effort to acquire, will slip right out.
Make sure to plug the holes in your leaking bucket before you decide to pour money and time to get site traffic, whether those holes are inventory issues or issues with your website flow.
Our recommendation is to determine your paid strategy based on inventory. If you have the budget, great. But don’t be so quick spend it, as that money might be better spent when the holes in your bucket are closed.
Remember, no matter how many improvements you make to your website experience, if your inventory doesn’t exist, it doesn’t matter. You can’t sell from an empty wagon. Please know this before you throw a bunch of Facebook budget at the campaign. It won’t be worth your money.
Now that you understand the strategic, to put your marketing energy, here are several recommendations going forward.
*Focus all your attention and energy towards maximizing sales for those products.
*List the products on your collection page in order of best selling to least selling.
*Think of the first row in your collection page as the center aisle in a grocery store. It’s the most valuable spot because that’s where all the attention goes. Feature your top seller on your homepage.
*Focus your creative asset strategy on making the best creative for those top sellers.
*Make sure you have plenty of stock on your best sellers, even if it means not getting new inventory for your low performers or holding off on new product launches.
Pareto was onto something. His rule has proved out in almost every area of business, and ecommerce is no different.
I challenge you to run an 80/20 analysis on your business.
Identify top sellers, make specific creative for it (or refocus old creative to more prominently feature those top selling products) and your ads will have a better chance to become winners, without breaking your budget!