Marketing Myth: 80% of Sales Come from the Top 20% of Brand Buyers

Tam Le is the regional strategy senior manager for Carat APAC.

The following article is the first in a series of what we’re calling “Marketing Myths.” There are a lot of misconceptions and “rules of marketing” out there that have been disproven over time by research. Each article in the series will focus on one marketing misconception, drawing largely on the work of Byron Sharp and the book How Brands Grow. Through the series, we hope to help you avoid these marketing myth pitfalls and make you stronger media professionals.

3 – 5 minute read


Over the years, I’m sure you’ve come across Pareto’s Law: the heaviest 20% of a brand’s customers deliver at least 80% of its sales. Although there are definitely extreme buyers, a small percentage of customers who purchase the brand very frequently, the ratio is rarely as extreme as 80/20.

pareto-law-colour-01Pareto’s law is often used to justify a marketing strategy that targets the heaviest buyers versus a mass marketing strategy that targets all category buyers. The buyers are worth more, so the brand’s marketing team can justify spending more per buyer and ignoring the 80% of lighter buyers who only contribute to 20% of sales.

However, in Sharp and Romaniuk’s 2007 study of buyers in Australia and South Africa, they saw that from shampoo to cat food, the heaviest 20% of buyers rarely contributed more than 65% of sales volumes and sometimes as low as 35%. On average, the top 20% only contributed about 50%; so the ratio is more like 50/20. With that new ratio, it becomes much harder for marketers to justify ignoring the other 80% of lighter buyers who actually contribute to about half of sales.

To further undermine the strategy of targeting the brand’s heaviest buyers, is Sharp’s “law of buyer moderation.” It points out the fallacy of assuming a buyer’s purchase behaviour in a past year will predict their future buying behaviour. For example, let’s say Buyer A bought 5 boxes of pasta in 2015 and was categorized as a heavy buyer, whereas Buyer B bought 0 boxes of pasta in 2015 and was categorized as a non-buyer. But in 2016, Buyer A only bought 3 boxes of pasta and Buyer B bought 1 box. Our heavy buyer became a more moderate buyer, and our non-buyer became a light buyer.

This is consistent with Anschuetz’s 2002 findings which studied the sales data of a leading brand of tomato sauce in America using IRI and AC Nielsen panel data. The analysis showed that the non-buyers in Year 1 of the study went from accounting for 0% of sales volume to 14% of sales volume in Year 2, and the heavy buyers went from accounting for 43% of sales volume in Year 1 to 34% in Year 2. Conclusion: Non-buyers and light buyers are heavier buyers than you think, and heavy buyers are lighter.

 

What can we as media professionals take away from these studies? First and foremost, a marketing strategy that aims to increase sales by only targeting the heavier buyers is unlikely to succeed. And conversely, targeting the large amount of lighter buyers and non-buyers has a far greater chance of success.

As unsexy and outdated as mass marketing sounds, reaching all buyers of a category is vital, especially because the light, occasional buyers make up a greater percentage of sales volume than previously assumed.  However, mass marketing doesn’t have to be unsophisticated. With constant digital advertising evolution, there are new opportunities to reach consumers in different ways and different times to be more relevant and fit better into their lives. We have the opportunity to create sophisticated strategies for mass marketing that will yield high reach and high relevancy.

 

To read more Marketing Myths: https://rocketapac.wordpress.com/category/media-musings/marketing-myths.
Pareto’s Law image courtesy of http://www.warrenknight.co.uk