At the turn of the last century, Italian economist Vilfredo Pareto developed a mathematical formula--a principle--for economics which is, at it's core, the rule of 80/20. The numbers 80/20 were selected based on the fact that, at that time in Italy, 80% of the wealth was under the control of 20% of the population.
The 80/20 rule is the simplest means of illustrating the theory as a whole. While these numbers more than aptly describe the Pareto Principle, there are also cliches that can expound on the basic qualities of the principle, ''life is not always fair or life is not always balanced'' for example.
However, American management consultant, engineer and economist Dr. Joseph Juran may have explained the theory with the most poetic simplification, ''the vital few and the trivial many''.
Essentially, the principle states that not all products, services, employees, geographic locations, ideas, means of production... (any business or economic entities for that matter) are created equal. The vast majority of production and income are generated by a relatively small number of the total number of entities in play.
Starting with Dr. Juran, the Pareto Principle has been used in economics and business since the 1940's and the theorem is as applicable in today's digital age as it was a century ago.
Something to Remember About the Pareto Principle
The implications of that fact are that the actual numbers within a business or enterprise will vary (greatly at times) depending on the company's profile or market.
For example, 90/10 or 99/1 have been figures lately thrown around in the media estimating the percentage of American wealth in the hands of the percentage of the total population. Generally, this would still also work under the Pareto Principle because you would most likely find that 80% of America's wealth is generated or controlled by the top 20% of income earners.
The Pareto Principal does not guarantee percentages or ratios, only the fact that the large minority has/does the vast majority. Looked at in a different way or a sales & marketing angle is that 80% of your sales/revenue will come from the top 20% of your customers or accounts. So keeping the top 20% of your customers happy is, generally, key to keeping the revenues flowing.
AdWords and The Pareto Principle
How to Apply the Pareto Principle to AdWords PPC Marketing Campaigns
Proprietors and ppc marketing firms must understand that the Pareto Principle can apply to every business. That is because every business is a microcosm of the macrocosm of economics. In other words, every business--even though they may sell hundreds or thousands of items--has a small number of products or services that generate the majority of their profits.
With that in mind, an e-marketer must commit to conducting due diligence. They must commit to discovering which products and services a company provides are those which generate the majority of the profit.
Once an e-marketer, strategist or consultant has done so, the AdWords campaign--and the funds for that campaign--can be divided accordingly.
Practical Application of The Pareto Principal to AdWords Campaign
The first step marketers should take is to determine which products and/or services generate the most profit or ROI for a company. The quantity of services or products sold is irrelevant. The target is the bottom line. Which products generate the most income.
The next step is to divide the products and/or services into bottom line percentages. What percentage of the total income is generated by product X and by product Y and by product Z.
Once the percentage of total income generated by given products and/or services is calculated, appropriate the AdWords funds proportionately. 80% of the budget should go to the top 20% of products, keywords, ad groups, etc.
Let's say you own an ecommerce sporting goods store. If you advertise with Google Adwords and utilize 100 keywords to target your customers, the key would be to find out from your Google Analytics data what are the top 20 converting keywords that lead to sales. Once you find out which 20 keywords out of the 100 are the best, you can then allocate more budget to bidding on them because you know they are you best producers. These 20 keywords should also produce about 80% of your sales according to the Pareto Principle. This principle, when it applying to Adwords management, business or life can help you optimize your time and budgets throughout the course of the day.
Here is sample taken from Spyfu.com. Here they show us a list of the Top 10 Ad buyers per day in Google Adwords. As you can see, the top 2 or 3 websites buy a lot more ads per day than the majority of other websites on this top ten list. Therefore, Google should continue to focus on keeping those accounts happy because it would hurt profits a lot more if those lost one of the top 2 or 3 accounts compared one of the accounts that is ranked 9 or 10 on this list.
While proportionate distribution is rational, there are variables that may cause an account manager to modify the allocation of funds. Promoting a new product, for example, may require a higher percentage of the funds than the product generates in respect to income, but it may be necessary in order to garner attention or gain some traction for the product in that market.
Product revenue dips are another reason an e-marketer might deviate from the profit percentage/funding allocation model. If a product has generated a great deal of profit in the past, but the number of sales seem to be falling inexplicably, devoting more AdWords funds to the product might be a solution. You still need to continually monitor your account's performance on all levels to understand what the data is trying to tell you.
Remembering that the Pareto Principal is a Theory, not an Objective Truth
Rather than becoming obsessed with the numbers and percentages and ratios, when applying the principle to an AdWords campaign, it's most important to remember that the minority does/has the majority. Understanding the theory is relative, gives marketers the liberty to experiment with different percentages, ratios and numbers to find the combination that works correctly for their business or market and maximize it to it's fullest potential.
Author Bio: Jeff Shjarback, MBA is a Digital Marketing Strategy Consultant, Writer and Blogger that enjoys blogging about internet marketing, small business, lead generation, economics, innovation & emerging technology, future trend analysis and business philosophy. To learn more about Jeff, you can visit his Google Author Profile.