The Pareto Principle and the Law of the Long Tail both address the 20/80 relationship, yet their emphases are entirely different. Explore the role distinction between elite minorities and ordinary majorities, and understand economic and social phenomena through the origins and real-world examples of these two laws.
The Pareto Principle vs. the Law of the Long Tail
“Most of the results (80%) stem from a few causes (20%).”
“The 80% ordinary majority produces better outcomes than the 20% core talent.”
The former is the Pareto Principle, the latter the Law of the Long Tail. These are familiar economic principles most people have heard of at least once or twice. Both principles are used to explain which group contributes more to an organization’s performance: the outstanding minority or the ordinary majority. They are also sometimes used to explain which product category contributes more to sales: a few popular items or a large number of ordinary items with mediocre sales.
Both the Pareto Principle and the Long Tail Principle deal with the relationship between a minority elite, often expressed as 20%, and the ordinary majority, often expressed as 80%. However, their underlying concepts are diametrically opposed. The Pareto Principle emphasizes the role of the 20% who are few in number but possess outstanding capabilities, while the Long Tail Principle emphasizes the role of the 80% who are ordinary but far more numerous. Many people confuse the two principles because, despite their opposite content, they both deal with the same theme: “20% vs. 80%.” This blog will explore the origins of the Pareto Principle and the Long Tail Principle, along with real-world examples of how both principles apply to economic and social phenomena. We’ll also briefly examine Price’s Law, which places even greater emphasis on the role and achievements of a small elite than the Pareto Principle does.
A Small Elite Drives the Economy
First, let’s delve into the long-established Pareto Principle. To easily grasp the Pareto Principle—that most outcomes (80%) stem from a few causes (20%)—consider these statements: “80% of a department store’s sales come from the top 20% of affluent consumers,” “80% of a company’s revenue is generated by the top 20% of high-performing employees.” “80% of all traffic accidents are caused by the same 20% of drivers who repeatedly get into accidents.”
Thinking of real-world examples like these makes it easier to grasp the concept than abstract explanations. However, the numbers ‘80’ and ‘20’ in the Pareto Principle and the Long Tail principle should be understood not as fixed, unchanging figures, but as symbolic representations of the majority and the minority. The Pareto Principle explains that most economic and social phenomena, such as a company’s work performance or product sales revenue, are not generated by the ordinary majority or average-level products. The core idea is that most outcomes are driven by a small number of highly capable elites, a wealthy minority with significant resources, or exceptional products.
The Pareto Principle is named after the Italian economist Vilfredo Pareto, born in 1848. In a paper written in 1896, he argued that 20% of Italy’s population owned about 80% of the land, and that 20% of the pea seeds sown in fields produced 80% of the total pea harvest. The term ‘Pareto distribution’ was used to describe the unequal distribution of wealth, where 80% of a society’s wealth is held by a minority of 20%, marking the first recognition of the Pareto principle.
The Pareto principle did not remain merely a theory confined to economics textbooks; it significantly influenced the real economy. Numerous management theories and marketing/sales techniques trace their roots to the Pareto principle. In 1976, Romanian-born American management consultant Joseph Juran further popularized the principle by asserting that 80% of a company’s quality control performance depended on the efforts of an outstanding minority, while the ordinary majority contributed only 20% to the overall results. Subsequently, a theoretical trend emerged in management studies, suggesting that focusing organizational capabilities solely on key issues would resolve the remaining 80% of problems automatically, as addressing the critical 20% would suffice.
The Pareto Principle became the theoretical foundation for premium marketing, often called ‘VIP marketing’ in the industry. Based on the assumption that 80% of total sales come from purchases made by the top 20% of customers with high purchasing power, the theory argues that it is a wise choice for companies to invest the maximum amount of money, manpower, and time into this 20%. Therefore, the VIP marketing practiced by high-end department stores and luxury brands is cited as a vivid example of the Pareto principle in action.
There is also a theory that emphasizes the performance and role of a small elite group even more than the Pareto Principle. This is Price’s Law, which emerged during the analysis of research achievements in the scientific community. It posits that a number of people equal to the square root of the total workforce in a specific industry generates 50% of the total output.
Applying Price’s Law to reality looks like this: In a company with 10,000 employees, half of the company’s performance is attributable to the 100 employees (the square root of 10,000). Despite having 10,000 employees, half of the company’s performance is attributable to 100 key talents. In other words, it is a theory that strongly emphasizes the role of a small elite. 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 has over a century of history, the Long Tail principle is a relatively recent theory, having emerged less than 20 years ago. It contains content diametrically opposed to the Pareto Principle and Price’s Law. The core of this principle is that the 80% ordinary majority creates more value and achieves greater accomplishments than the 20% exceptional minority. It is called the ‘long tail’ because, like a dinosaur’s tail—thin but extending far—it signifies that the ordinary majority plays a greater role than the thick but short body of the dinosaur (the exceptional minority). Indeed, when you look at a graph illustrating the long tail principle, you can see a long line, like a dinosaur’s tail, stretching almost straight out to the right.
The long tail principle emerged as a theory during the late 1990s to early 2000s, a period marked by the rapid development of the internet and the very beginnings of online e-commerce. The emergence of online shopping malls drastically altered how businesses sold products and how people purchased goods, enabling this theory to take shape. The ability to conduct business without the need for physical stores to display and store merchandise had a significant impact. Without the requirement for physical space, the variety of products that could be sold to consumers increased exponentially.
A prime example of the Long Tail principle applied in reality is the American e-commerce company Amazon. Amazon.com began as an online bookstore. So, what proportion of their total sales back then did famous books like bestsellers and steady sellers account for? Did the so-called ‘hot books’ dominate most of their revenue? Not at all. Significant profits were generated through unpopular books that offline bookstores wouldn’t even stock. Offline bookstores lack the physical space to display every book, and once they stock a title, they bear the burden of inventory costs. Consequently, they cannot carry niche books that sell only a few copies per year. In contrast, Amazon.com, with its lower inventory management costs, could readily sell these niche titles. This allowed customers to easily find specialized books catering to niche interests that were unavailable in regular bookstores. These niche and rare books accounted for over half of Amazon.com’s bookstore sales.
The Long Tail principle particularly fits well when describing the services of information and communication companies, which face no physical or temporal constraints. Major search portals like Google and Bing also derive the bulk of their primary revenue source—search keyword advertising—from small-scale ads placed by numerous small businesses and self-employed individuals. Examining the ads displayed on Google and Bing, and considering how many self-employed people pay for search keyword advertising on these portals, makes the scale of this revenue easily imaginable.
The person who introduced the Long Tail principle to the world was Chris Anderson, editor-in-chief of the American IT magazine ‘Wired’. In October 2004, he published an article in ‘Wired’ where he listed products sold by a specific company in order of popularity from left to right, plotted each product’s sales volume on the vertical axis, and connected them with a line. When connected this way, the line linking popular, high-selling products ends abruptly at a steep slope, while the line connecting less popular, ordinary products stretches endlessly low. The line connecting the ordinary products stretched thin but long, like a dinosaur’s tail. The total revenue generated from selling the products at the tail end exceeded the combined sales revenue of the popular products. As this fact became known, the Long Tail principle gained fame and, alongside the Pareto principle, became a representative economic law.
