Examining Pareto Law across department store shoppers

Abstract

Department stores invest in loyalty strategies that largely focus on retaining current high value customers in response to increasing competition in retail shopping. In this study, we examine the contribution of the top 20% customers for transaction frequency and value (“heavy buyers”) to the total sales, and the consistency of this contribution across departments within a store. We also investigate the heavy buyer stability over time across 3 years, from over 550 million transactions from a department store chain in East Asia. The results show that the Pareto ratio of the top 20% spenders account for 71% of revenue (and 52% of the total transactions), and the top 20% transactors represent 58% of revenue (and 62% of total transactions), which may signal the role of such heavy buyers to overall stores sales. At each department level, the heavy buyers (by value) contribute from 65% to 86% of the department revenue. Despite this, the stability of the top 20% segment over time varies greatly by department from 11% to 74%. Finally, whether high value customers in one department store also translate across departments, depends mainly on the department size in terms of its shopper penetration. The research furthers our knowledge on Pareto Law, with important implications for customer retention strategies and loyalty programs especially for retailers.