Netflix in Cuba: Pareto Principle
Netflix launched in Cuba. Most users choose the $7.99 Standard plan, while some opt for the $9.99 Premium plan.
What's the likely Average Order Value (AOV) for Netflix in Cuba?
Options: $7, $8.5, $10, $12
There could be two approaches to approach this challenge.
1. We know there are two options:
a) Standard plan : $7.99
b) Premium plan : $9.99
2. We're told that "most users choose the $7.99 Standard plan, while some opt for the $9.99 Premium plan."
3. Without exact percentages, we can assume a reasonable split (Pareto principle):
a) 80% Standard plan
b) 20% Premium plan
4. Let's calculate the weighted average:
(0.80 * $7.99) + (0.20 * $9.99) = $6.39 + $2.00 = $8.39
5. Rounding $8.39 to the nearest option given, we get $8.5.
Therefore, the most likely Average Order Value (AOV) for Netflix in Cuba from the given options is $8.5.
Approach 2:
1. We know that Netflix in Cuba offers two plans:
a) Standard plan : $7.99
b) Premium plan : $9.99
2. All subscribers must be paying either $7.99 or $9.99
3. Therefore, the Average Order Value (AOV) must fall between these two numbers, regardless of the exact distribution of subscribers between the plans.
4. Looking at the given options ($7, $8.5, $10, $12), only $8.5 falls within this range.
A bit about Pareto principle
The Pareto principle is a principle shows that in many situations, a small number of items in a group are responsible for the majority of the results or effects. This is often referred to as the "80-20 rule" or the "Pareto principle," which suggests that roughly 80% of effects come from 20% of causes.
Why is it important?
The Pareto principle is crucial because it helps us understand and predict patterns in various complex systems, from business and economics to nature and technology. It reveals that many phenomena aren't distributed evenly or normally, but instead follow a skewed pattern.
Applications in Other Industries
Several industries face similar situations where real world constraints becomes very important to consider while projecting growth, profit, bookings etc.
Venture Capital: The Pareto principle in venture capital is stark - typically, about 10% of investments generate 85% of returns. For instance, a study by Horsley Bridge of venture funds found that 6% of investments returned 60% of the total value across their portfolio. This distribution underscores why VCs seek "home run" investments that can return the entire fund, rather than aiming for consistent modest returns.
Social Media: On social platforms, content creation and engagement follow Pareto principle distributions. On Twitter, it's estimated that 10% of users create 80% of tweets. Similarly, a study of Instagram found that the top 10% of users received 83% of likes.
E-Commerce: In e-commerce, the Pareto principle often manifests in the "long tail" phenomenon. For example, Amazon reported that 57% of its book sales come from outside its top 100,000 titles. However, a small percentage of bestsellers still drive a disproportionate amount of revenue.
When guessing how things are spread out, think of the Pareto principle: a few things usually matter most. Start by imagining 20% of stuff causes 80% of results. This works for customers, products, or social media posts. Remember, a small group often has the biggest impact. This idea helps spot what's most important quickly.
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