Of Leicester City, Fat Tails and Whales
Most people have heard some version of the 80/20 rule in ecommerce, namely that 80 percent of your revenue comes from 20% of your clients. Whether this is true or an oversimplification, the idea that some customers are more valuable than others is indisputable. The question is how can you use this knowledge to improve your revenue? And what in the world does this have to do with Leicester City’s EPL title?
Logarithmic odds and Where Bookies got it Wrong
Leicester City’s EPL Championship was good news not only for its long suffering fans but also for those who were lucky enough to put their money on them before the season began. Leicester was given odds of 5,000/1 before the season started, meaning a measly £5 wager would net someone £25,000 by the seasons end. It is estimate that bookies lost more than £10,000,000 becomes of Leicester City’s miracle run.
Of course Leicester City was a long shot to win the title so where did the bookies go wrong? After all, statistics & logarithms figure heavily into how odds are calculated, whatever bookies lost on Leicester City should have been made up by money they made on all the favorites losing, right?
The issue, is that the admittedly long shot odds of Leicester City being crowned champions were nevertheless still significantly underestimated. While it was very unlikely, it simply wasn’t 5,000/1 unlikely. This phenomenon of underestimating the odds of an unlikely event was developed most fully by Nissim Taleb and is called the Black Swan Theory.
The Black Swan Theory describes events that are thought to be very unlikely, have a disproportionate effect on the human experience and then are later rationalized ex post facto that they were actually likely (The black swan refers to the idea that one sees only white swans doesn’t prove that a black swan will never occur in nature). This is exactly what happened with Leicester City, they were thought to be an impossible champion (5,000/1), had a huge impact on the gambling industry and are now being rationalized as have being one of the preseason favorites (because of the addition of Vardy)…just one that the gamblers didn’t realize were a favorite.
Fat tails refer to the statistical normal distribution graph that assigns long shot events a slightly greater chance of occurring than the “regular” normal distribution graph. Taleb took this theory to the financial markets where he bet on long shot futures and eventually made a fortune by cashing out when long shot events occurred (by his estimation, the markets “predicted there should be a stock market crash every 80 years while in reality one happened every 8+ years). In other words, by focusing on “long shots”, its possible to make more money than by focusing on events that are more likely to occur.
How can you use this theory to improve your eCommerce business? One way to do so would be to focus on “whales”, or in other words users who not only buy but have very large carts when they checkout. While they may represent a very small percentage of your traffic, its possible that catering your website and design to them will in the end make you more money than focusing on multiple smaller eCommerce clients.
To see how your whales interact on your website, click the +Add Segment button to the right of the All Users Filter. Select Conditions and set revenue to a number that makes sense for your business (2-3 times an average order).
By focusing on the demographics and user behavior of these users, you can drastically improve your website performance and revenue generated from your website.