Have you ever lost a very important customer?

 

Do you treat all customers the same?

 

You shouldn’t.  And here’s why.

 

You’ve possibly heard of the 80:20 rule – sometimes known as the Pareto principle.  The principle tells us that a minority of causes – roughly 20% – are responsible for a majority of the effects – roughly 80%.  Now the “20” number isn’t precise.  Neither is the “80”.  Indeed they don’t even need to add up to 100.  The importance of the principle for you is that it applies in your business – a minority of causes are responsible for a majority of the effects.

 

Imagine you have 100 customers.  Imagine 20 of them are in category “A” which is responsible for 80% of your profit and the remaining 80 are in category “B” which is responsible for the other 20% of your profit.  Let’s assume further that all “A” customers contribute equal amounts of profit – and that all “B” customers do too.

 

The typical “A” customer will contribute 80/20 or 4.00% of your profit.  The typical “B” customer will contribute 20/80 or 0.25% of your profit.

 

What’s the ratio of 4% to 0.25%?  It’s 16!  “A” customers are 16 more times profitable for you than “B” customers.

 

Now imagine you’ve €1000 or £1000 or $1000 or your currency of choice to spend on cultivating relationships with customers.  Or you have 100 hours of your limited time.  Where are your scarce resources best spent?  On an “A” customer or a “B”?  Should you treat them both the same?

 

Another way of looking at this is to ask what happens if you lose an “A” customer.  One thing that happens is that you lose 4% of your profit.  But you’d also then need to gain 16 new “B” customers to replace the profit from that single “A” customer.

 

So let’s get practical.  Knowing is one thing.  And now you know.  But what can you actually do with this sort of insight?  A recent example in my own business might help you.  Last night I launched a customer satisfaction survey.  Did I send the (online) survey to all my customers?  No.  I sent it to a subset – a group of “A” customers.  All things being equal, it’s the “A” customers I listen to more.  All “A” customers are important – I’d hate to lose any of them!

 

Identify your “A” customers if you don’t already know them.  Cultivate your relationships with them.  Seek out more of them.  Then you’ll be leveraging Pareto for profit!

 

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Posted on by Brendan

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