The Pareto Principle vs. the Law of the Long Tail both deal with the 20% and 80% relationships, but their emphasis is completely different. Explore the different roles of the elite and the ordinary majority, and understand the origins and real-world examples of both laws to understand economic and social phenomena.
The Pareto Principle vs. the Law of the Long Tail
“The majority of all effects (80%) are due to some causes (20%).”
“The 80% of mediocre people produce better results than the 20% of exceptional people.”
The former is the Pareto Principle, the latter is the Law of the Long Tail. These are familiar economic laws that everyone has heard of at one time or another. Both are used to explain which group contributes more to an organization’s performance: the exceptional few or the mediocre many. Sometimes they are also used to explain which product line contributes more to sales: a popular product with only a few varieties or a mediocre product with many varieties but so-so sales.
Both the Pareto Principle and the Law of the Long Tail deal with the relationship between the elite minority, represented by the 20%, and the ordinary majority, represented by the 80%. However, their implications are diametrically opposed. The Pareto Principle emphasizes the role of the small but highly capable 20%, while the Long Tail emphasizes the role of the mediocre but much larger 80%. Many people confuse the two laws because they are diametrically opposed, yet they cover the same topic: “20% vs. 80%”. In this blog, we’ll discuss the origins of Pareto’s Law and the Long Tail, as well as examples of their application to real-world economic and social phenomena. We’ll also briefly discuss Price’s Law, which emphasizes the role and performance of a small elite more than Pareto’s Law.
A small elite drives the economy
Let’s start with the age-old Pareto Principle. A simple way to understand the Pareto Principle, which states that the majority (80%) of all effects are due to a small percentage of causes (20%), is to think of a statement like this “80% of a department store’s sales come from the top 20% of wealthy consumers,” ‘80% of a company’s revenue is due to the performance of 20% of its most talented employees,’ or ”80% of all traffic accidents are caused by 20% of drivers repeatedly.”
These abstract concepts are easier to understand when you think of real-world examples. However, the numbers “80” and “20” in the Pareto Principle and the Law of the Long Tail are not fixed, unchanging numbers, but rather symbolic representations of the majority and minority. The Pareto Principle explains that most economic and social phenomena, such as the performance of a company or the profit from the sale of a product, are not caused by the average majority or the average product. The idea is that most things happen because of a small but highly skilled elite, a few wealthy people with lots of money, and superior goods.
The Pareto Principle is named after Vilfredo Pareto, an Italian economist born in 1848 who, in an 1896 paper, argued that 20% of the population of Italy owned 80% of the land and that 20% of the pea seeds planted in a field produced 80% of the total pea harvest. This unequal distribution of wealth, in which 80% of the wealth of a society is held by 20% of the population, is known as the Pareto distribution.
The Pareto Principle has not only remained a theory in economics textbooks, but has also had a major impact on the real economy. Many management theories and marketing and sales techniques have their roots in Pareto’s law. It was also popularized in 1976 when Joseph Juran, a Romanian-born American management consultant, argued that 80% of a company’s quality management performance depends on the efforts of a small number of outstanding individuals, while the mediocre majority contributes only 20% to overall performance. Since then, there has been a theoretical trend in management that calls for focusing an organization’s efforts on a key agenda, arguing that if you solve the 20% of critical problems, the other 80% will take care of themselves.
Pareto’s Law became the theoretical foundation for premium marketing, also known as “VIP marketing” in the marketing industry. The assumption is that 80% of all sales come from the top 20% of customers with the most purchasing power, and it makes sense to invest the most money, people, and time in those 20%. VIP marketing, as practiced by high-end department stores and luxury brands, is a vivid example of the Pareto Principle in action.
There is another theory that emphasizes the performance and role of a small elite even more than Pareto. This is Price’s Law, which was born out of analyzing research achievements in the scientific community. It states that the square root of the number of people working in a given industry produces 50% of the total output.
To apply Price’s Law to the real world, here’s what it looks like If you have a company with 10,000 employees, half of the company’s performance is due to the 100 people who are the square root of 10,000. It’s a theory that strongly emphasizes the role of a small elite: you can have 10,000 employees, but half of your performance is due to 100 key people. This theory was discovered in 1963 by Derek de Solla Price, a physicist and historian of science.
The ordinary majority leads the minority
Compared to the Pareto Principle, which is over 100 years old, the Law of the Long Tail is a relatively new theory, less than 20 years old, and it states the exact opposite of the Pareto Principle and Price’s Law. The idea is that the 80% mediocre majority creates more value and accomplishments than the 20% exceptional minority. It’s called the “long tail” because it’s like the tail of a dinosaur: the thin but long tail of the dinosaur, which means that the mediocre majority plays a bigger role than the thick but short body of the dinosaur (the exceptional minority). In fact, if you look at a graph depicting the law of the long tail, you’ll see a long line, like the dinosaur’s tail, extending off to the right in a nearly straight line.
The law of the long tail was theorized in the late 1990s and early 2000s, when online e-commerce was just beginning to take off thanks to the rapid development of the internet. The theory emerged because the rise of online shopping malls changed the way businesses sell products and people buy things. This was largely due to the fact that it was no longer necessary to have a brick-and-mortar storefront to display and store goods, which exponentially increased the number of products that could be sold to consumers.
A prime example of the long tail in action is the American e-commerce company Amazon. In its early days, Amazon.com operated as an online bookstore. But how much of their overall sales were made up of bestsellers, staples, and other popular books? Did the so-called “best sellers” make up the majority of their sales? Not really. The bulk of their revenue was generated from less popular books that brick-and-mortar bookstores don’t even carry. Brick-and-mortar bookstores don’t have enough space to display books, and once they do, they have to carry a lot of inventory, so they can’t carry unpopular books that sell a few copies a year. Amazon.com, on the other hand, is able to sell any number of unpopular books because the cost of managing inventory is low, and people can easily find books that are not available in regular bookstores. These unpopular or rare books accounted for more than half of Amazon.com’s bookstore sales.
The law of the long tail is particularly relevant when describing the services of information and communications companies that are not physically or temporally bound. Even large search portals like Google and Bing derive the majority of their revenue from search keyword advertising from small ads from many small businesses and self-employed individuals. If you look at the number of ads you see on Google and Bing, it’s easy to imagine how many small businesses are paying for search keyword ads on the portals.
Chris Anderson, the editor-in-chief of the American tech magazine Wired, is credited with popularizing the law of the long tail. In October 2004, he published an article in Wired in which he listed the products sold by a particular company from left to right in order of popularity, with the amount of each product sold on the vertical axis and connected them with a line. If you connect the lines, the line connecting the popular products with high sales will be steep and short, while the line connecting the mediocre products with low sales will be low but endlessly long. The line connecting the mediocre products is thin but long, like the tail of a dinosaur, and the sum total of the money made from selling the mediocre products is more than the sum total of the popular products. Once this was realized, the law of the long tail became famous, and along with the Pareto Principle, it became a classic economic law.
