Pareto Squared in Action I

Following on from my blog explaining Pareto Squared, here is another example of applying the principle.

An organisation has 20,000 donors. It has a limited budget, but a tough target. Provided it is not mailing it's donors too often (which many think would be over 30 times a year, so this is not likely) then it would make more money mailing the top 20% of donors (4,000) at least twice, and then just mailing as many of the next 16,000 that budget allows.

In other words:
Mail 20,000 donors at a cost of, say, $20,000. ($1 per pack)

Or Mail
Top 4,000 with a better pack costing $6,000 ($1.50 per pack)
Mail those 4,000 again with a reminder pack costing $6,000 again
Use remaining $8,000 to mail the 'best' of the remaining 16,000 donors with a cheaper - say just 8,000 at $1 per pack.

In the end, only 12,000 of the 20,000 donors are mailed BUT you will make more money.

Sean

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.

Sean