The 80/20 Rule and how it applies to eCommerce
Updated: 5 days ago
The 80/20 Rule (also known as the Pareto Principle) is a well-known theory invented by Italian economist Vilfredo Pareto in 1896. It states that for many events, 80% of effects come from 20% of causes. He invented this theory once he noticed that 80% of the land in Italy was owned by 20% of the Italian population.
Since then, this theory has proven to be true and can be applied to pretty much every aspect of life - from wealth distribution, politics, time management & even eCommerce.
In eCommerce, according to the Pareto principle….
80% of your sales will come from 20% of your website visitors
80% of your sales will come from 20% of your products
80% of your sales will come from 20% of your target locations
80% of your ROI will come from 20% of your marketing campaigns
Of course, the ratio will never “exactly” be 80/20 but the correlation will be around that region.
Your job as an eCommerce professional is to find the golden 20% of business resources that is producing the 80% of business results and invest more into that golden 20%. This is key because it’s impossible to sell every single product to every single website visitor in every location you are targeting. Yet, this is a common mistake that I see a lot of eCommerce businesses trying to do but by doing this they are actually just hurting their profits.
For example, let’s assume that your business targets customers from all the major cities in the UK. After analysing one years’ worth of web analytics data you notice that customers from London bought 3 times more and have a 50% higher AOV than the average customers from other cities.
By focusing majority (80 %) of your business’s marketing efforts towards your highest value customers (The Golden 20%), you will do a good job at keeping your customer acquisition costs low and your business will achieve the best profitability possible.
A common mistake that A LOT of businesses do is spend 80% of the marketing budget in an attempt to squeeze the 20% of sales from the remainder 80% of customers/products/locations. This then leads to them having high customer acquisition costs and low profits, sometimes even losses.
If your business has to spend £10,000 in marketing just to generate £5,000 worth of sales would it be worth the investment?
How to find the Golden 20%
In eCommerce, there are 4 key drilldowns you can follow to find your business’s “Golden 20%”.
Top Products/Product Categories
Top Traffic Channels
Top Landing Pages
If you use Google Analytics, you can do these drilldowns by using this custom report.
Please note that you MUST have Enhanced Ecommerce setup and working in your GA account for this report to work.
Start off by finding your business’s top selling locations;
Determine whether your business sells to customers on an international level, national level or regional level.
If your business sells on an international level (worldwide), find the top 5-10 countries that generate the most sales/visits/orders for your business.
If your business sells on national level, find the top 5-10 regions/cities that generate the most sales/visits/orders for your business.
If your business sells on a region and/or city level, find the top 5-10 ten local areas that generate the most sales/visits/orders for your business.
Using the custom report I shared earlier, the first page will be an overview of all the locations that your business is targeting. Choose the top country/region/city that generates the most revenue depending on the level you are looking at.
In this example, my client sells at a national level to the UK population so this report shows the top revenue generating UK cities.
Here we can see just 10 cities out of a total 535 (1.87%), contributed 49.2% of the total revenue during this period.
The next ideal steps from here would be to continue the drilldown process and find the top selling products in each of these top revenue generating locations. I’m going to continue by looking deeper to London.
Top Products/Product Categories
Your business may have dozens or even hundreds of products on its website, however not every product will generate the same amount of sales/revenue. You will always have a small percentage of products that generate majority of your business’s sales/revenue.
Your job as an eCommerce professional is to find the products that are already selling well and sell even more of them. Avoid investing a lot of time/resources into trying to sell the products that are struggling to generate revenue, this what leads to higher acquisition costs and lower profits.
Using the custom report shared earlier, click on the location you wish to look deeper into and click on the Product Analysis tab at the top of the report.
This will show you a breakdown of the top products that generated the most revenue in that location during the specified period.
Here we can see that only 10 out of a total of 1515 products (0.66%) managed to generate 29.03% of the total revenue.
The next ideal steps from here would be to continue the drilldown process and find the traffic channels that are driving the sales of these top selling products.
Top Traffic Channels
Once you know your top selling products, you need to the traffic channels that are mostly responsible for the driving the sales of those products. Again, not every channel will have the same contribution. You will most likely have a small percentage on traffic channel that is responsible for generating majority of the sales.
As an eCommerce professional, it’s your job to identify the top revenue generating traffic channels and invest more in them.
Using the custom report shared earlier, click on the top selling product that you wish to look deeper into. I’m going to look into product 1 (The one that contributed 4.56% of revenue).
Your report should look similar to the example below.
Here we can conclude that the top channels responsible for driving the sales of our top selling product in London is Organic Search (google/organic) and Paid Search (google/cpc).
At this point, we can easily make a case to our boss that we should increase the investment on the SEO & Google Ads campaigns related to our top selling product in London. However, there is more drilling down that we can do.
Next, let’s look at which landing pages are responsible for converting the most visitors into customers from these top traffic channels.
Top Landing Pages
It’s important to know which landing pages are converting the most so that we can optimise them and boost our overall sales performance even further.
I would recommend looking at the top landing pages of your top selling locations.
To do this, go to Behaviour > Site Content > Landing Pages
Next, create a custom segment for each top selling location you wish to look into and apply them to the report. I’ve created and applied a custom segment for London traffic.
For more information on how to create custom segments, Google has written a guide on how to do this. You may access it here: https://support.google.com/analytics/answer/3124493?hl=en
Also, make sure that “eCommerce” is selected in the 3rd section of the report.
Your report should now look similar to the one below:
Here, we can see that the HOME page is the top landing page for our London customers and is generating the most revenue for our business.
The homepage will likely be the top landing page for most eCommerce businesses as most customer shopping journeys do tend to start off from the website’s homepage. However, if you have just launched a new product and/or you’re running massive product-related campaigns, product category pages or product description pages may sometimes end up being the top landing pages.
After identifying the top landing pages of your website, its crucial to assess how visitors move through your shopping funnel after landing on these pages and determine if there are any major drop-offs within your website’s shopping funnel.
This process is called Shopping Funnel Analysis and I have another article called Using Analytics to Reduce Shopping Abandonment which explains this in more depth.
In addition to these 4 key drill-downs, there are further drill-downs you can follow to help pinpoint that “Golden 20%” of your business. These could be:
Top Discount Codes
Top Content Articles
All of these can also be found within your Google Analytics account provided that you have Enhanced Ecommerce tracking setup correctly.
As an eCommerce professional always remember the 80/20 rule. Find the 20% of business resources that is producing 80% of business results and focus majority of your time, effort & money towards optimizing that 20%.
This would help in keeping acquisition costs low and profits high.
No business has an unlimited budget no matter how big it is so avoid falling to the trap of investing a large portion of your budget towards squeezing the remaining 20% of revenue from the remaining 80% of business resources.
If you have any questions about any of the concepts explained earlier or would like us to assist you with finding the “Golden 20%” of your eCommerce business, get in touch and let’s have a chat.
Thanks for reading!