Applying Pareto's Principle to User Segmentation and Site Design

  |  June 24, 2004   |  Comments

Why should your site be all things to all people? Make it effective for those who matter most.

Last time, I briefly mentioned the 80/20 rule. There was so much feedback about it, I thought I'd talk about it and different ways to apply it to your business.

The 80/20 rule, known as Pareto's Principle, states 80 percent of a country's wealth and land are owned by 20 percent of its people. Formulated in 1906, today it's used generally in every field imaginable.

Most of us are familiar with the rule, but many apply it to business in only a few standard ways. Worse, we often jump to the wrong conclusions because we think of the rule in simplistic terms without fully understanding its consequences. Applied properly, it can help elucidate pressing issues and problems and refocus an intangibly large set of needs and ideas into a much more manageable chunk of issues. Let's look at a few subtle ways the 80/20 rule can be applied and misapplied.

Profitable Web Pages

My company works on a lot of big-brand site redesigns. One of the first questions we ask clients is, "Where's the money?" A Web site can be huge, but generally not all its pages are interesting or profitable. Online, consumers overwhelmingly search rather than browse. It would be easy to claim the SERP is the source of 80 percent of profits.

Though this is an obvious conclusion (and often true in our experience), there's another step to take before reaching it. Assuming 80 percent of traffic filters through 20 percent of your pages, the SERP is probably one of the top two pages. But the 80/20 rule also states 80 percent of profits come from 20 percent of visitors. Are those 20 percent of visitors part of the 80 percent who search? Or are they the 20 percent who browse? If your search engine is lousy, are you actually skewing results because 80 percent of users can't find the products they want?

First, understand which customers generate the top 20 percent of profits (which may be a different 20 percent than those who generate the top 20 percent of revenue). Then, try to understand how those customers buy things. Are these top 20 percent informed buyers who just search for products they need? Do they require comfort and education around purchase decisions? Do they spend much money impulsively? Answers vary widely based on brand, value proposition, price points, and product line.

Note the top 20 percent of buyers ranked by profit may be (and usually are) different from the top 20 percent of buyers ranked by revenue. While at barnesandnoble.com, I spent a lot of time figuring out how to cross-merchandise the top sellers' list. Deep discounts on the top sellers lead to razor-thin profit margins. Most visitors buy top-selling books, but those books aren't the most profitable. We cross-sold items on those pages to migrate the top 20 percent of revenue generators (or the top 20 percent of products sold) to the top 20 percent of profit generators.

Think about Amazon.com's used merchandise strategy. Amazon often offers new and used products through partners and users that are cheaper than Amazon's own prices for those products. But out-of-print books generally have a much higher profit margin than new ones. Used merchandise can be bought back at 20-50 percent of its original value and sold for 70-80 percent of current retail value. It makes a lot of sense to offer a cheaper way for customers to buy products, especially as those routes often yield higher profit margins.

Twenty percent of user segments yield eighty percent of your profits. For marketers, it's an age-old game to figure out who the 20 percent are and market to them. Designers must also understand this. In design meetings, I often hear people repeat the following questions:

  • Can every user understand this page?

  • Can a user get to every section of this Web site from this page?

I've written about user types and the different levels of care they need. As a user experience strategist, I'd never recommend trying to confound site visitors. But pay attention to the 20 percent of users who really matter. It's not cold-hearted to let the others go.

Any good salesperson will tell you 20 percent of their prospects take up 80 percent of their time. At some point, if those 20 percent aren't destined to be the most profitable, the salesperson stops returning their calls. Likewise, marketers don't even try to cater to the bottom of their customer segments.

Why should your site be all things to all people? Make it the most effective for those who matter most to the business.

80/20 in the Design World

Designers continually debate whether "you can get there from here" when constructing site navigation and global site elements. One philosophy says the Web is by nature nonlinear, so users should have one-click access to all site areas.

Another philosophy follows the 80/20 rule. It states only 20 percent of navigation paths are followed, so allow one-click access only to those places. Why create a confusing or overly linked visual jumble when 80 percent of it is clutter?

Let's go back to that first question: Where's the money coming from? If your most profitable customers jump around the site, design should enable that behavior. If those top-tier customers remain in one category, don't clutter their experience with links they'll never use. Don't distract them; you may cut into a major profit center if you move them away from their purpose.

A site we're working on has terrific data on what links are most accessed on its home page and in its global navigation. Cross that with profitable customer data. You'll discover not only the most popular links but also the most profitable. These are two very different ideas.

Frank Lloyd Wright designed a college campus with all the buildings, but no sidewalks. The college's president asked where the sidewalks were. Wright said he'd come back a year later and build the sidewalks, after the students had decided where they belong. He was using the 80/20 rule. He knew he could build sidewalks to and from every building, but most students would only ever use a small percentage of them. He was more interested in maximizing the sidewalks' usability than building paths no one would take.

The 80/20 rule is a powerful tool but can be used improperly if applied in a vacuum. Carefully consider different ways the rule affects your business (even when it seems to contradict itself). Eventually, it'll lead to more profitable user segmentation and more profitable site design.

Have you applied these ideas to your business? Am I 80 percent right or only 20? Let me know your experience!

Until next time...

Jack

Nominations are open for the 2004 ClickZ Marketing Excellence Awards.

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ABOUT THE AUTHOR

Jack Aaronson

Jack Aaronson, CEO of The Aaronson Group and corporate lecturer, is a sought-after expert on enhanced user experiences, customer conversion, retention, and loyalty. If only a small percentage of people who arrive at your home page transact with your company (and even fewer return to transact again), Jack and his company can help. He also publishes a newsletter about multichannel marketing, personalization, user experience, and other related issues. He has keynoted most major marketing conferences around the world and regularly speaks at Shop.org and other major industry shows. You can learn more about Jack through his LinkedIn profile.

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