The 80/20 rule is fundamental to every business.
Stepping into another lecture at University I was greeted by yet more business theory. As I sat there listening about the 80/20 rule (Pareto Split) I thought to myself “here’s something else I’m learning that will probably have no impact on my daily working life.” How wrong was I!
Since then I have found that the 80/20 rule is fundamental to every business because it works across so many functions – finance, customer spend, employee productivity, marketing engagement rates etc.
The 80/20 rule got its name after an Italian economist Vilfredo Pareto, who observed that 80% of income in Italy was received by 20% of the Italian population. Yes, its foundations lie within economics, but you don’t have to be ‘Mr Statistic’ to believe it can be useful for your business (I’m a prime example).
So why does the 80/20 rule have anything to do with the title, ‘Why customer A is more important than customer B?” In simple terms it’s because 20% of your customers provide 80% of your company’s revenue. This is the reason why customer A is more important than customer B.
Once you have found out which customers are in your top 20%, you need to keep them happy. This means spending more time with them, understanding their problems, building stronger relationships and treating them more like a partner than a customer, even if it’s at the expense of smaller accounts. I’m not saying ignore your smaller accounts because they still contribute revenue to your business. What I am saying is prioritize your time in relation to your customer’s spend.
Customers come in different categories. Some earn you an amazingly disproportionate amount of money, many make you a little bit of money, and some even waste your time. With the last group, you may even lose money selling to them.
Finding your top 20% of customers can be a pain in the… (you can add your own word here) but there are ways to achieve it:
Data mine your customer lists
Look up sales data on your customers and apply the R-F-M rule. Check which customers on your list bought most Recently, bought more Frequently, and spent the most Money. Boom, you’ve just found a chunk of your top 20%. If you find it difficult to mine your data it may be worth investing in a sales intelligence tool to make it much easier.
Location, location, location
Find out where your money-making customers are actually based. Generally, certain cities or areas provide most of your business. For instance, a building supplies company may have most of their customers within a 20-mile radius. Understanding your customer’s location means you can save money on the Internet advertising and other forms of marketing by narrowing it to specific geographies.
Switch it around
As 20% of your customers account for 80% of your business, it’s also true that 20% cause 80% of your problems. These take time away from your top customers by eating up your valuable time on the phone or with support tickets. Sometimes it may even be advisable to ditch these customers, especially if you’re not making a profit from them. A smaller yet as profitable customer base means you need fewer support processes or more cost-effective premises. Basically, your business becomes more efficient.
Find out what they are buying
Almost all businesses have a few ‘silent high-volume buyers’. By this I mean customers who require little maintenance so you barely notice them but are actually high spenders. You’ll probably find that you spend time supporting the noisy, small customers rather than the silent high buyers. This it’s where it’s worth reducing your time on the small customer and directing your time towards building a better relationship with your hassle-free, big spenders. You’ll probably then find out if there’s additional cross-selling opportunities.
We all want to pay attention to all of our customers, it’s natural. However, in the long run, it’s much more beneficial to prioritize your time focusing on the 20% who buy most from you and not the 20% who cause problems.
Need help identifying your 80/20 split? Get a free demo of our software to see how easy it can be.