The 80/20 rule, also known as the Pareto principle, is a principle that suggests that you can attribute 80% of outcomes to 20% of causes. In the context of pricing, one can interpret this principle to mean that 80% of your customers will be willing to pay lower prices, while 20% of your customers will be willing to pay significantly higher prices.
The 80/20 rule
Also known as the Pareto principle, the 80/20 rule is named after Italian economist Vilfredo Pareto, who observed that about 80% of the land in Italy was owned by 20% of the population.
One can apply the Pareto principle to many different situations in nature. For example, about 20% of the individuals in a population of animals may be responsible for producing about 80% of the offspring. About 20% of the species in a forest ecosystem may be responsible for supporting most of the biological diversity. In a human population, about 20% of the people own about 80% of the wealth.
The Pareto principle is not a strict rule, but rather, a general observation that often holds. In many cases, the distribution may not be exactly 80/20, but it is usually close. The Pareto principle can help identify the most critical factors in a given situation and focus on them to achieve the most significant impact.
One way to use the 80/20 rule in pricing is to offer a range of prices for your treatments, with lower prices for the majority of patients (e.g. LASIK) and higher prices for a select group of patients willing to pay more for additional features or benefits (e.g. lens replacement or lenticule extraction).
But how much could you theoretically charge for a vision correction procedure if you could supply your patient with enough value to justify the price?
Let’s say that in a population of 10,000 eyes, 80% of buyers will pay for glasses and contact lenses while 20% of buyers will pay at least €2500/eye for surgical vision correction. The following chart shows the group of eyes that had surgery as a red rectangle.
The area under the curve to the left of the red rectangle represents the volume of people who might pay less than your price for vision correction. For example, a practice that does 2000 eyes at €2500/eye has an output of €5MM.
That suggests that you may want to offer a treatment that appeals to those patients yet still provides similar results but with less convenience (e.g. PRK). In contrast, the space within the curve above the red rectangle represents the volume of customers willing to pay more if you offered them more value. To maximise margins and revenue, we’ll further explore this area.
The green rectangle represents the volume of patients in the market who would be willing to pay double (i.e. €5000/eye) your price (€2500/eye). According to the 80/20 principle, the predicted response for a price of €5,000/eye is 894 eyes for a total sales output of €4.47 million.
Hypothetically, a practice could charge €5000/eye for lens procedures and make almost as much as the LASIK/PRK practice with less than half the patient volume. Or, you could use this chart to predict how many people would be willing to pay for lens replacement or lenticule extraction eye procedures.
As an illustration, let’s push the limits of this hypothesis and multiply the price for vision correction by ten and charge €25,000/eye.
According to the 80/20 principle, the predicted response for the price of €25,000/eye is 138 eyes for a total sales output of €3.45 million. That means that – hypothetically – you could treat 138 eyes and charge as high for as €25,000/eye, assuming you could provide sufficient value.