Platt Perspective on Business and Technology

Social media demographics as a possible challenge to the Pareto principle, in online market dynamics 1

Posted in social networking and business, Web 2.0 marketing by Timothy Platt on August 17, 2013

About a month ago I responded to a newly offered comment to one of my postings: When Information Becomes Cheap and Ubiquitous Attention Becomes Rare and Costly. A brief exchange of messages ensued, with that conversation thread appended to that posting as a short sequence of comments and replies. And I stated there, that I would write a follow-up posting to expand upon my comments re the application of the Pareto principle to modeling and understanding online market dynamics, and particularly as members of online communities are observed to primarily go to some small number of web sites available in any given vertical market space to do the bulk of their online business.

I said in my primary comment in that conversation thread that I would come back to this again and with a goal of examining and even challenging automatic assumptions that the Pareto principle must always apply here. And that is what I will at least begin to do in this posting.

I want to start with a small piece of housekeeping though, writing in follow-up to a related point that I made in that comment. I cited how long tail search terms and pay per click marketing based on them are sometimes thought of as offering an end run around the Pareto principle as a bottleneck in limiting most business to only a few same-market sites. I outlined how long tail marketing per se should only be expected to at most reframe the terms under which this same empirical phenomenon occurs with Pareto remaining alive and healthy for predicting overall online marketplace behavior. But I wanted to add here, at least brief consideration of a business model that I know some see as breaking out of this pattern anyway, and specifically because of long tail term bidding and marketing and their use. So I start this discussion on that note.

Some businesses bid on and seek to control pay per click marketing placement for their e-commerce sites, across tens and even hundreds of thousands of long tail search terms and phrases. There are even a few businesses out there actively simultaneously bidding on a million and more such terms as they seek to gain marketplace advantage in being found online and through search engines. The argument for this breaking them out of the Pareto principle bottleneck assumes that by approaching the marketplace from so many distinct and separate search term approaches, they would be pursuing too complex and comprehensive an approach to be blockable by any given Pareto-based bottleneck. This argument overlooks some very basic points.

• The Pareto principle when applied to online commerce, simply states that if you look at any given online market, most visitor traffic and page hits, and most completed transactions will go to a comparatively quite small percentage of all web sites competing for that business. This is a statistical point and not one based upon individual site performance or individual online business strategy or how that is implemented. If one or a few sites do find novel ways to get into that 10% or even 5% that achieve significant business performance success online, that is not likely to change the overall proportion of businesses that do so, or lead to overall market performance patterns that statistically deviate from what the Pareto principle would predict. In fact the Pareto principle says nothing as to how any given business does or would succeed in getting into its predicted favored few percent on top. It simply says that only some will so succeed.
• In the real world, I add, businesses that bid on very large suites of long tail search terms, in virtually all cases also bid on at least carefully selected short tail, premium value, high cost per-bid terms too. My point here and with this point is that while a long tail search term-only strategy might be pursued by small and highly specialized niche market businesses as discussed in my above cited posting comment and certainly for their online marketing, the large and in many cases already general-market leading businesses that seek to capture high pay per search priority for seemingly endless numbers of long tail terms, are not generally actually following long tail search term online marketing strategies at all, except as one perhaps even minor component to a larger and more complex program. And their overall pay per click search engine marketing is in most cases only a component of still larger online marketing programs. And under the terms I have been discussing here, they still face Pareto and have to work at their marketing and communications to get into its favored small percentage of online successes anyway.

So I begin this discussion by once again writing in terms of the overall validity of the Pareto principle in online marketing and both in general and for specialized niche markets. But I said in my comment reply that I noted at the top of this posting, that I would also at least seek to raise some questions as to the validity of tacitly, automatically assuming the Pareto principle to all online commerce contexts. That is what I will at least start here next. And I begin that by asking two very basic questions:

• What does the Pareto principle assume as a given, about the basic nature and structure of the marketplaces and communities that it predicts the behavior of?
• What details or features of such a community would have to be changed, and in what ways to broaden out the high performance success rate business population, and expand out the numbers of businesses in a vertical that would be among the most successful? Rephrasing this question in more explicitly statistical terms, what would have to change, for the distribution of business activity achieved across an online market’s competing businesses to become more platykurtic?

Towards the end of the above cited comment reply, I invoked the terms social media and viral marketing and repeat them again here as topic points I am going to lead this discussion to. I am going to begin addressing the first of the two questions I just posed here, and will continue that and this discussion as a whole in a follow-up posting in a few days, making this a two part series.

• The Pareto principle assumes that marketplaces and communities of consumers in them are simple and effectively unstructured.
• Individuals differ and in many ways, but for purposes of this model and its marketplace, and consumer based analysis, when people are looking to purchase a gas barbeque grill, or a shirt, a book or music CD or essentially any other type or category of product or service, their individual differences blur into statistical significance when you look at overall marketplaces and at overall cumulative consumer behavior.

Touching on the second of those questions, systematic violation of the Pareto principle as a filtering bottleneck would require the emergence of collateral factors and patterns that were apart from the specific purchase decisions themselves but that systematically skew where those decisions are finalized, and in large enough numbers to impact on overall marketplace statistics and market dynamics.

As I noted above, I will continue this discussion in a next series installment. Meanwhile, you can find this and related postings at Social Networking and Business 2, and also at Social Networking and Business and Web 2.0 Marketing.

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