Our guest post’s teaching tip today comes from Dr. Jeff Heyl, who is Associate Dean at Lincoln University in Christchurch, New Zealand.
Apple has recently been involved in a court case with Epic Games. If you’re not aware, Epic Games is one of the largest players in the $100 billion mobile gaming industry. They have created popular games like ZZT, Fortnite, Gears of War, Blade, and Unreal. A major part of their revenue comes from in-game sales where players can purchase upgrades or options. But the app stores which distribute these games control the in-app purchases as well as the basic game. Epic was not happy about paying Apple and Google a percentage of these purchases and sued them both. A California court has recently issued a verdict that will force Apple to allow other payment methods.
Here’s where it gets interesting, and reveals the universality of Pareto’s law. It turns out the sale of the mobile games is the major source of revenue for the app stores. Essentially 70% of an app store’s revenue comes from gaming apps, but gaming customers account for less than 10% of all app store customers. Compare this to the 80% of app store customers who generate virtually no revenue, 80% of the apps on the store are free.
Within this one situation, there are two clear examples of Pareto’s Law at work, the 70/10 apparent in the purchasing behavior of gaming customers and the 20/80 ratio relating to free apps. If we relate those to the classic ABC prioritization model presented in Chapter 12, the app sales would be A’s, the free apps the C’s. This further illustrates that the old 80/20 ratio is very flexible. Neither of these match directly to that ratio, but both illustrate the concept.
As a classroom example, it might be enlightening to ask the students to come up with other examples of Pareto’s Law at work. It’s very common once you start to look for it. This can lead to some interesting discissions about how one could use the analysis in a decision-making perspective to prioritize effort and resources in areas other than inventory management.