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Econsultancy has a breakfast briefing next week which will advise digital companies how they can optimise their businesses by applying the 80:20 rule.
The speakers at the briefing are Dr Mike Baxter, who has authored a number of reports for Econsultancy, and Robert Colquhoun, who specialises in multichannel customer acquisition and retention strategies.
I've been talking to Dr Baxter about the 80:20 rule, and how online businesses can benefit from its application...
How does the 80:20 rule affect digital businesses?
One of the challenges facing online businesses is how to ensure that you focus on what is important. The 80:20 rule is a simple but very well proven principle that most effects come from few causes.
The majority of revenue comes from just a few customers or a few products, most traffic comes from few keywords, and most time is spent looking at a few pages. The 80:20 rule was first was first used in economics; 80% of property is owned by 20% of the people, 80% of the wealth is controlled by 20% of the people.
In terms of online businesses, the numbers vary a bit but as a rough rule, 80% of revenue comes from 20% of your customers, and 80% of traffic is generated by 20% of your total keywords.
Our argument is that online businesses need to find the 20% of things they can improve that will impact the 80% of their business.
So the challenge for online businesses is to identify that 20%?
It's not just one 20%, it's lots of them. Online businesses are complicated things and there is not just one lever to adjust to make the business run smoothly.
There are lots of levers and knobs and the difference between success and failure in the online world is a matter of fine tuning. You can have one part of your business working perfectly, such as getting people to visit your site, but if other parts don't work as well,i.e. getting them to buy your products or services, your business will fail.
So, the secret is to find the 20% sweetspot in a wide range of acquisition, conversion and retention activities. This makes the challenge a little deeper!
With analytics and various measurement tools, is it easier for online businesses to apply and learn from the rule than offline?
No online business can ever claim it is short of data, as every click can be logged, tracked within an online journey and related to desired outcomes. The problem for most people is that there is too much data. They need help, therefore, in working out what data is the most insightful, what data can lead to the most effective action. In short, the data they should spend most time analysing to make the biggest improvement in their business.
In the offline world there is a lot of data, but it is rarely as joined-up as online data, and it is a lot more difficult to identify cause and effect relationships. Without these relationships you have to guess what to change to bring about specific improvements.
Are too many online businesses spending money on shiny tools; videos, widgets etc without focusing on the simple things?
Who hasn't fallen into the trap of buying a shiny new running machine, an exercise bike or a product like the Wii Fit in the confident expectation that this purchase alone paves the way to body beautiful? Online businesses have lots of shiny new toys they could start using: videos, podcasts, blogs, feeds, tweets and widgets. Just as the Wii Fit will have turned out to be the answer to the personal fitness challenge for some people, so these online business tools might offer the path to profitability for some businesses.
They might, however, end up stored at the back of the garage alongside the other magic bullet solutions tried previously. In talking to a colleague, Robert Colquhoun, about this dilemma, we realised that we both shared a back-to-basics approach to online business fitness.
Reviewing the clients we had done consultancy work with over the past 6 months revealed that by far the greatest opportunities lay in helping them do what they currently do better rather than enabling them to do something different.
All online businesses, however, need to know the basics about what makes their business work and which 20% of activities that they spend their valuable time on influences the 80% of business performance that matters.
So are many online businesses not getting the basics right?
There are some great companies running brilliant online businesses in the UK. I would never say they are not getting the basics right, otherwise they would not be as successful as they obviously are. My challenge to even the most successful online business is whether they have thought of ALL of the key drivers of success?
I've never met any online business leader who thought there was no scope for improvement. What gets them out of bed in the morning is the challenge of making their business even better still and this takes us right back to the 80:20 rule. Keep looking for the few things you can change that will have the greatest impact.
At the other end of the scale, there are lots of businesses making a profit and satisfying customer needs but that are nowhere near optimised. They are growing at a fraction of their potential. They need to spend less time on what they know all about and do well and look at other aspects of their business that are crying out for improvement. Again there is a problem knowing where to begin, especially if you are moving out of the routine activities within your personal comfort zone.
In which case, my advice would be to use data to guide you towards the most bangs for your buck, take one small step out of your comfort zone and try to improve one small part of your business that will have a big impact on overall business performance.
Do some online businesses struggle to make sense of all the data they gather and apply it in the right areas?
I once worked out for an e-commerce client of mine that Google Analytics could be used to produce over 7m data points representing the performance of her business. So it is not that individual business people are somehow inadequate in getting their head around the available data. There is simply too much of it. It is being generated at a rate that is physically impossible to consume.
So we all need to selective in choosing what data we look at. Whilst it might be fascinating to learn that our site had a visitor from Uzbekistan last week who used Firefox v2 on a Mac, stayed for three minutes and visited seven pages, if we are not going to do something with that data, we don't need to know. So another guiding principle is actionable analytics. Only spend time looking at data that you can do something with.
To take a specific area as an example - how can the rule be applied to SEO and keyword selection?
Most online businesses have an extensive list of keywords but the vast majority of their traffic comes from a small subset of those keywords, the non-brand keywords are an even smaller sub-set and the non-brand keywords driving new visitors is an even smaller sub-set still. If new customer acquisition is your aim in search marketing, focus your efforts on the keywords that matter. How do we translate this into a keyword strategy for SEO?
There are three things that matter in SEO: demand, competition and conversion. Starting with the keywords you know are effective non-brand keywords attracting new visitors (from above), the first step is to extend this list using keyword tools, such as Wordtracker.
Find out which of this extended list has most demand. Now look at the competition for these keywords. Keyword effectiveness index is a good start but you really need to understand how feasible it is to get a reasonable ranking on the search engines for these terms, and this requires link analysis. Finally, even if you got into the top three in the search results, this doesn't mean that you will sell anything. Keywords vary enormously in their ability to send traffic that converts for a particular product or service. The best way to check this out is by running a pilot PPC campaign.
So, now we have a set of keywords for which there is demand, where the competition is manageable and which will send traffic that converts. Now you can specify the amount of link building you need to do to start generating the natural traffic you seek.
Just before you press the 'Go' button, another thing to learn about the 80:20 rule is that not all 20% sweetspots are equal. The 20% of effort you invest to improve 80% of your search traffic might cost you five times as much as focusing your efforts similarly on an improved email campaign. Having worked the numbers, however, at least you should know the relative effectiveness to investing your time in different activities.
Do you have any examples of quick and easy wins that businesses have made thanks to the application of the rule?
Onsite search typically converts at between two and five times higher than link navigation through a site. For sites with lots of on-site searches (more than 5% of all visits) make sure it works.
Also, research suggests that sending emails that have different content for different types of customers (according to analysis of historical customer data) will tend to at least triple both traffic and sales.