It was in 1896 that Italian economist Vilfredo Pareto noted that 80% of the land in Italy was owned by 20% of the population. In the 120 or so years since, his now famous 80/20 rule (that is, 80% of effects come from 20% of the causes) has been applied to everything from sports and finance to software and science.
However, it is in the world of business that the Pareto Principle is particularly prevalent, be it 80% of your sales made by 20% of your staff, 80% of your revenue coming from 20% of your products. Or, as is most relevant here, that 80% of your profits come from just 20% of your customers.
We know. The thought that having more customers is not necessarily better for your business goes against the grain of your instinctive urge to grow. The bigger the market, the bigger the opportunity, right? Not if you’re willing to buy into Pareto’s findings. If you do, then you may quickly have two significant revelations.
First is that, even if it’s not quite 80%, a heck of a lot of your customers are not bringing much to your business. They may even be bad for it. Mostly, this means they have a disproportionate cost to serve. For example, they require excessive use of staff’s time, exploit your customer service policies, frequently change their mind about services at your expense, or simply fail to make timely payments.
Second, and equally important, is that somewhere within the market are a select number of existing customers (or prospects) with the ability to make an exceptional difference to your business. Depending on your industry, this could be less than a hundred to tens of thousands of people. Whatever the number, these are customers who spend a lot, spend often and keep coming back for more.
It shouldn’t be too hard to identify the topmost echelon of your most profitable customers. Depending on the size of your business, you could well know them on a first-name basis. Similarly, you may well be aware of your worst customers – those whose emails and phone calls you and your team dread.
You don’t need to be an intellectual like Pareto to work out that the future success of your business depends on you finding as many of the former as possible, while keeping your distance from the latter. Turning your back on any customers might initially seem counterproductive, but when you consider that they are costing you money rather than bringing you profit it’s far more logical to show them the door.
Of course, this still leaves a rather big questions unanswered. What do you need to do next? This is where customer insight tools (such as Blue Sheep’s Money Map) can provide you with the intelligence to take action.
Your top tier customers will likely have several things in common, beyond the amount that they spend. It could be their industry, their role, the size of their business or purchasing behaviour. It may be that they are vocal advocates of your services.
Identifying the shared traits of your best customer will help you build an ideal customer profile, which can then assessed against other variables, such as market penetration (where you’re having the most success) and market growth (to identify your key areas with the most potential). This then will reveal to you more prospects who fit the profile of those customers you love so much.
With the knowledge that these hot prospects exists, and where to find them, you can shape your marketing strategies accordingly, to be more efficient and effective. Strive to be the exception to Pareto’s rule!
Read our Customer Insight to Target Your Most Profitable Prospects eBook.
Download this eBook to learn more about Blue Sheep's Money Map and how to:
Build longer lasting relationships with your most profitable customers - and acquire new ones
- Discover which customers are costing more to serve than the revenue they return. Sack the 'Avoids'!
- Tailor your marketing spend and campaign tactics to different customer segments