Wednesday, June 24, 2009

Pareto Squared

Paul and I called our companies after Vilfredo Pareto because Pareto noticed a mathematical phenomena know as the Pareto Principle, or the 80/20 rule.

He deduced that 80% of the land of Italy was owned by just 20% of the population.

Put another way, a minority of inputs is usually reponsible for the majority of outcomes in a data-set.

On a social justice level, less than 10% of the world's population own over 90% of wealth. Less than 20% of the population have access to over 80% of the world's food, medicine, computer power and more. Our businesses are trying to do a bit to change that.

On the other hand, from a marketing point of view, 80% of your trade usually comes from just 20% of your customers. On larger data sets it seems to get really close to 80/20. We compared data from 23 charities in Australia and together, 80% of their income came from just 19.4% of their donors.

This got me thinking - on a large enough data set, would the principle work twice?

So, if 20% of my donors give 80% of funds, would 20% of those donors give 80% of that money.

For example, I raise $1,000,000 from 10,000 donors.

$800,000 comes from 2,000 donors.

But does at least $640,000 (80% of $800,000) come from 400 or less donors (20% of 2,000)?

The answer, across most of the charities I have worked with is yes. I imagine this will apply to many non-charities too.

This is very, very important. It means that much more than half (80% of 80% = 64%) of a typical charities donations will come from just 4% of donors (20% of 20% = 4%).

I call this Pareto Squared..

To see this in action, look at this blog which tells you how to boost your mailing income by applying this principle post mailing.


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