Aug 22, 2025 | Analytics, Branding, Marketing, Uncategorized
The Pareto principle, the 80/20 rule with variation in the numbers, works in every situation I have ever seen.
Almost.
It is the exception that makes the rule.
Marketers use it extensively to allocate marketing budgets across competing arenas. Define your ideal customer, understand purchase cycles and habits, recognise different behaviours in different channels and circumstances, and allocate accordingly.
It always seemed to both make sense and work well.
Until it did not.
Research done by Andrew Ehrenberg, Gerald Goodhardt, and Chris Chatfield in 1984 produced a statistical model called the ‘Dirichlet Model‘. It is a statistical reflection of how consumers actually behave across FMCG categories. The model showed that rather than repetitive brand loyalty, most consumers buy from a small repertoire of acceptable options.
The model reveals that many people purchase a brand only now and then, yet collectively they represent a huge share of total sales. This counters the popular pareto model that assumes 80% of profit comes from the top 20% of buyers.
Hovering around supermarket shelves in the eighties, observing consumer behaviour, and interacting where possible, the truth of this counter intuitive behaviour was clear. However, the pull of Pareto was powerful, so we often had a foot in both camps.
It is the mid 1980s, and yogurt is the new category growth star. Ski and Yoplait dominate store shelves. Shoppers have their personal preferences, some lean strongly toward Ski, others swear by Yoplait, and many have their flavour favourite across both. (they prefer Ski Strawberry to Yoplait, but the Yoplait apricot to Ski) A few smaller regional players also vie for attention, but if there’s a promotion, most consumers happily mix it up.
As the marketing manager that included Ski in the brand portfolio of responsibility during these heady growth days, it was easy to assume the Pareto principle held: 80% of profits come from 20% of devoted buyers. Focus on those heavy consumers, turn the moderate fans into loyalists, and watch the profits roll in, right?
The Dirichlet model exposed the paradox, although at the time I had not heard of it. However, the numbers coming from store sales data and simple observation of consumer behaviour in stores confirmed the consumers disassociation from the theory of Wilfredo Pareto.
So, how does the Dirichlet model suggest fast moving consumer marketers build their brands against competitive brands and the power of retailer ‘pirate’ brands?
Acknowledge Mixed Brand Buying.
Even if you’re proud of your loyal fans, don’t be blinded by them. Ski-lovers might switch to Yoplait for a flavour your brand doesn’t offer, or vice versa. The data shows people happily shop around, even if they have a ‘Favorite.’ Acknowlede that behaviour while creatively giving consumers reasons to buy yours in preference to others.
Look for Wider Reach.
Heavy users are part of the story, but broad availability is often the bigger deal. If your products aren’t visible, buyers won’t remember you at that decisive moment.
Keep Things Distinctive.
You’re not just building brand awareness, you’re building mental availability. That’s how you stay top-of-mind when the shopper sees a new promotion or wants a unique flavour. Whether through catchy ads, recognizable packaging, or fun limited-edition variants, it’s all about creating mental triggers.
Rotate and Refresh.
Both leading yoghurt brands tested new flavours and replaced underperformers regularly. This strategy not only sparked interest among loyal buyers but also tempted the light or occasional buyer who came for the novelty, and might just pick you again next time. It also pleased retailers to have a supplier that explicitly had a ‘one in one out’ brand policy.
Ultimately, the Dirichlet model teaches us that brand loyalty isn’t an all-or-nothing affair. Even with strong preferences, people jump around.
Consider that next time you’re rethinking a marketing campaign. It might feel odd to invest in those who buy you only once in a while, but that large group can deliver a collective boost that keeps you on top.
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Pareto killed by Dirichlet in blogs
The pareto principle holds in every domain I have ever seen, except one.
To build a brand, you must keep existing customers, increase their preference for your brand, and attract new customers.
A pareto allocation of marketing funds would imply that most of your budget should be aimed at the 20% of customers that produce 80% of your profit.
That allocation would work against you.
Truly loyal customers are less likely to go elsewhere than light or occasional buyers, and such an allocation does nothing to attract new users.
In this case, Pareto was wrong.
Aug 7, 2025 | Analytics, Branding
Investing in building a brand is only done by rational people when they can reasonably expect a return on that investment in the future.
Even with the benefit of hindsight, putting a value on a brand is an exercise in both judgement and maths. Most disregard the maths and invest because the marketing textbook says it is a good idea.
The outcome of having a brand with market power is increased cashflow. Luckily, cashflow is measurable absolutely in the past, and possible within boundaries of probability in the immediate future. The challenge is setting those boundaries of probability.
The purpose of investing in a brand building program is very simply to build incremental future cash flow. To that end, there are only three considerations.
Mental availability.
A brand provides ‘mental availability’ when a potential prospect is in the market. This is a different metric to the more common ‘awareness’ metric, as it implies that when a potential customer starts the process of considering alternatives to addressing a challenge they face, your brand is front and centre. Awareness lacks the second component. Coca Cola has huge awareness, but that does not do you much good when you come into the market for a new car.
Differentiation.
A brand articulates in a prospects mind why they should use you rather than a competitor to address their problem. Differentiation is only useful when it is wrapped around something competitors cannot or choose not to do. To continue the car analogy. For the last few years, a few new car buyers wanted to be seen as a sensible, ecologically aware and able to afford an expensive car that projects a specific image felt an electric car was the best option. Tesla was the only viable choice. That has rapidly changed as competitors finally caught up the technology, are producing objectively better cars at a cheaper price, at a time when the Tesla brand has been tarnished.
Greater value.
The third is the promise to deliver value to the customer greater than they would find elsewhere. Value is not the cost to the customer, although it is a key component of the equation.
Value = Utility – Cost.
As you increase utility, the impact of cost on the calculus of value lessens. Conversely, utility is a combination of quantitative and qualitative assessments every buyer will make, usually without great consideration. In the case of Tesla, the utility of owning one of their cars has been reduced substantially, so the value of the brand has been significantly reduced.
The key question in attaching a value to a brand is therefore the ‘Utility’ it delivers that is convertible into future cash flow.
In the literature, and established practises of those who value brands for a living, there are many ways to do the calculation.
Following are a few of the more obvious.
- Brand attributable cash flow. What percentage of gross margin can be attributed to the brand. Attribution is one of the ‘stickiest’ problems in marketing, so be very careful to separate reality from what you would like to believe. User research is the only way to be as sure as you can be.
- Royalty premium. Brand licencing is a well-worn track. What would you be prepared to pay to have that aspirational brand on your product?
- Price premium, and elasticity. What premium to the market average does your brand attract, and how ‘price elastic’ is that premium? Years ago when Meadow Lea was king of the margarine market, it held a dominating market share at premium prices. This meant that the benchmark shelf price was roughly the same as the alternative brands, usually just a cent or two more, but the promotional discounts demanded by retailers were less, we were able to attract significant added shelf space as there was ‘pantry stocking’ happening when of special, we won the preferred time slots for promotion, we did not need to promote quite so often, and the volume differences between standard sales at standard shelf price and on promotion sales were not as dramatic as competitors. It is not always just the headline price that counts.
- Weighted distribution. What percentage of distribution points that could stock your brand do so. This is mostly a measure for B2C, and it is too often forgotten.
- Customer repeat purchase. How often does a customer purchase your brand compared to others? Repeat purchase, particularly at non promotion prices is the holy grail of FMCG marketing. Price discounting in FMCG has just about destroyed all but the very best brands, so this measure needs to be able to filter out price as the motivation. For example, a house-brand at a standard discounted price to the market may seem to have a high repeat purchase rate, but price can be the determining driver for some consumers. Besides, an expectation of a low price is a lousy brand attribute, and does not contribute meaningfully to brand value.
- Net promoter score. This has become a widely used measure, and sadly, widely misused. Every time I pay an insurance premium, I get an emailed NPS survey asking about my experience. Clearly, the insurance company marketing people are deluded about the drivers of the payment of another insurance premium.
- Mental availability. This is the ‘kingmaker’ measure in many markets. I added it here as it is a measure that is calculatable with market research.
The word ‘Brand’ can mean many different things to a casual observer. To those who understand the word from a commercial perspective it is simply a device that is an indicator of the probability of future cash flow.
