Long Tail and 80/20 Rule Analysis

Have you ever considered the concept of the long tail and 80/20 rule analysis? There is a reason they go hand-in-hand, but first some starting comments.

First, if you are not familiar with the long-tail here is the basic concept. Within any area there are niches. For example, when it comes to books there are those that are best sellers or at least bigger sellers. However, also in the category of books there are numerous niches that sell considerably less books. Interestingly, these niches may not be big yet they still offer an opportunity for a company willing to serve them. Though the big niches tend to be what we are most aware of, these little niches can be well worth exploring. It is these little niches to which the long tail is referring.

Along with the long tail is the concept of the 80-20 rule that says that approximately 80% of results come from 20% of input or effort. So, for example, 20% of products may result in 80% of sales.

Here is the question. How do these two concepts relate? Well, first off, within a category (like books) there exists the 80/20 rule. So, in the case of books, in general we can expect approximately 80% of book sales will come from approximately 20% of the book titles. However, if we were to remove the 20% of titles, the remaining 80% of titles can be broken down similarly so that approximately 20% of those remaining titles will create about 80% of the sales of the remaining titles. This exercise can continue on down to multiple levels. That means that a smaller book seller might find it best to focus on a smaller niche where the competition is less. Now, granted that books are not necessarily the best place to put this into practice, but the concept is intended to help a company identify products where it can be competitive. In other words, find a niche!

Combining the Two Ideas

Since the 80/20 rule is present within the long-tail it is easy to see that this presents opportunities in multiple areas to use long tail and 80/20 rule analysis. For example, perhaps your company sells 100 products and 20 of them make up about 80% of your sales. Putting aside any focus on those 20 products you might want to focus on the remaining 80 products (the long tail of your product line) and apply the 80/20 rule to them to identify the 20% of those products that may offer an opportunity for additional sales (perhaps significant additional sales) with perhaps very little additional effort. In fact, you could find that one or more of those products could surpass some of those in the top 20% without seeing any fall-off of sales in those products being surpassed.

Financial Analysis

This same idea of combining the 80/20 rule with the long tail can be used for long tail and 80/20 rule analysis of expenses and assets. Perhaps the top 20% of your company’s expenses cannot really be reduced, but by digging deeper into the top 20% of the remaining expenses you may be more likely to find ones where significant savings can be realized. For more on this read 80/20 Expense Analysis. You can do the same thing analyzing accounts receivable for collection purposes or inventory for reduction.

Don’t forget, this is not just a one-step process. You can carry this on to deeper levels. By that I mean this. Imagine you eliminate the first 20% of expenses that cannot be significantly reduced. Then imagine that the top 20% of the remaining expenses also cannot be reduced significantly. Well, there is no reason you cannot continue on the same path with the remaining expenses. The point is that these two concepts combined offer opportunities to reduce expenses, increase sales, collect more receivables, reduce inventory, etc.

I think this is one of the most powerful business concepts available to us. What do you think?

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As always, your comments are welcomed.

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