Willie Sutton, Pareto, and 80/20

When asked why he robbed banks, the notorious bank robber Willie Sutton is said to have responded “because that’s where the money is”. Over a hundred years ago, Pareto first observed that in most instances, a “significant few” (the 20%) can be identified with most of the “scale” (the 80%) associated with the topic being studied.

We decided to put the 80/20 concept to the test across a broad spectrum of business-to-business markets. We analyzed 67 datasets spanning a wide range of industries, products, and geographies. With each dataset, we spotlighted the “Significant Few” – the large segments that made up the 20% cluster. Then we examined how the segments in that 20% cluster scored in terms of variability, stability, and volatility. Here are some of our findings:

Across all our datasets, 74% of the “scale” occurred in the largest 20% of the segments. Certainly 74/20 in the real world is close enough to 80/20 to validate the concept. Some examples:
• Familiar with O’Hare’s terminals? Passed through Hartsfield or Heathrow? Maybe your business is impacted by the airline industry. It shouldn’t shock you that 97% of takeoffs and landings occur in 20% of listed airports.
• Perhaps you ship goods by train or your products and services serve the railroad industry. 79% of rail kilometers are in 20% of the countries with railroads.

The variability around our results was narrow. 80% of the cases that we studied fell within 20 percentage points of the 74% weighted average. That of course means that half of all the cases have even more “scale” than the 74% average; many include more than 80% of the scale.

The “Significant Few” segment remains quite stable. There is little change in the make-up of the 20% cluster even over a ten year period, an interval much longer than that covered by most strategic plans.
• As familiar examples, the segments for countries with the greatest oil reserves, states with the most personal income, hydro electricity consumption by country, and rail travel modes were unchanged.
• Shifts that did happen occurred at the 80/20 boundary. For example, Indonesia recently pushed Poland out of the top 20% of coal producing countries.

The “Significant Few” is less volatile than the “Insignificant Many”.
• Corn production varies three times as much in the countries that fall into the “Insignificant Many” category compared to production in the cluster of countries included in the top 20% of “scale”.
• Demand for diesel engines varies 50% more in the “Insignificant Many” segments than demand in the “Significant Few” group.

We often hear the observation that it costs as much to sell and serve a small customer as a large customer. The 80/20 concept suggests a very high rate of return on your investment in sales and service for the small number of customers or segments that account for the significant majority of your business.