Truth in Concentration in the Land of 80/20 Laws

Among the more prominent truisms in marketing are 80/20 type laws, e.g., 20 percent of the customers account for 80 percent of the purchases. These kinds of statistics indicate a certain degree of concentration in customer purchases; i.e., the extent to which a large portion of the product's total purchases are made by a small fraction of all customers. Such concentration levels, suggesting that markets can be segmented in various ways, are often reported in basic marketing texts. We show that a meaningful interpretation of these concentration statistics is not nearly as easy or immediate as it is to compute them. The key factors influencing the degree of apparent concentration in purchases are reviewed, and we present a modeling approach for estimating the true level of relevant concentration among customers.

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