Not all customers are created equal. Some come back day in and day out, truly appreciating what you do for them. Others may pay you, but they definitely don’t value you. Or they waste so much of your time that you don’t make any profit from them.
Before we dive into how to focus on the best customers, we need to go over the 80/20 Principle.
What is the 80/20 Principle?
In life, business, and marketing, the majority of inputs are responsible for the majority of outputs. What does this mean? It means only a fraction of what you do is responsible for the rewards you enjoy. And this fraction usually hovers around the 80/20 mark.
The 80/20 Principle was first applied to income distribution (20% of a country’s population has %80 of the country’s wealth) by Vilfredo Pareto and is frequently called the Pareto Principle.
Look at your products, customers, and marketing campaigns. Only about 20% will contribute to 80% of your revenue. It won’t be an exact 80/20 relationship but it’ll be highly disproportionate. You might see a 64/30 or even a 99/10 relationship. The important thing to remember is that not everything contributes equally. A fraction of your inputs will carry the weight for everything else.
By focusing on the 20%, the most productive part, you can dramatically increase your effectiveness. This means more time and more profit.
Most importantly, if you can replace the 80% of waste with the 20% of productivity, you can achieve results several orders of magnitude greater than what you have right now.
What does this mean for your customers?
It means that only about 20% of them are supporting your business. The rest are either providing marginal profit or actually draining profit as you attempt to make them happy.
The most important market research you can do is to figure out which customers comprise that 20%. You’ll need to know their demographics (age, income level, location, education, etc) and what they want the most. The bet way to do this is to simply ask. When you see them, get to know them better. If you’re running an online business, surveys and emails are both viable choices. If all else fails, put a list of your best customers together and pick up the phone. Ask them questions like these:
- What’s your biggest problem that you want to solve by using my product/service?
- What are your goals?
- What aspects of my product/service do you care most about?
Once you are dialed into this segment, you’ll want to do two things:
- Find more customers just like them since they’ll significantly add to your bottom line.
- Make your current customers in this category as happy as possible. Bend over backwards to give them what they’re looking for. Not only will they refer you people just like themselves, they’ll also become even better customers.
What about the other 80% of your customers?
Over the long run, you want to replace them. Customers are not always right. Some aren’t even worth the trouble. The time you spend with customers that will never be happy with what you do is less time you have to find customers that will love your business.
Feel free to do this gracefully and slowly grow the 20% to replace your less productive 80%.
Many of your customers are probably somewhere in between. They provide some level of profit, just not nearly as much as your best customers. Continue to do what you can for these customers, they’re just not a great source of growth for your business.
Remember: if a customer drains your profits, turn them away. Let them drain the profits of your competitors.
Want to learn more about the 80/20 Principle?
The 80/20 principle is one of the basic philosophies that I use for life, business, and marketing. If you’d like to dive deeper, I highly recommend The 80/20 Principle by Richard Koch. It’s a fast read with plenty of insight. You can find it on Amazon here.
“or even a 99/10 relationship”
Would love to get there!
Lars Lofgren says
Same revenue, fewer customer headaches 🙂