How to Use 80/20 Principle To Get To Your Best Customers
All customers are not built equal. Some make you more money and some cost you more money to keep.
In a rather insightful way, Richard Koch’s classic The Pareto’s Principle (or the 80/20 Principle) actually puts numbers on the ‘some’ part of the equation.
Roughly, only 20% of your customers contribute to 80% of your revenue.
Which means that 80% of your customers (who only contribute to 20% of your revenue) demand time, energy, resources, staff, and everything else your business has.
The story doesn’t just end with 80% of your resources being spent on customers who don’t matter to your business, it also means developing special skills just to keep Ms. Customer happy.
If you actually put your own numbers to test, you’ll find that Pareto’s principle is actually scarily, almost accurate, and insightful.
As you apply the 80/20 Principle to every single process of your business or every area of your business, you’ll begin to weed out what doesn’t work for you. You’ll streamline and make things more efficient.
The end result is that you’d be working with customers who actually contribute to your business. Your customers also become evangelists since you give them more time. See what you can do with your customers based on the 80/20 Principle:
Mine in and mine out
You have a list of customers, all right. Do you know who your most profitable customers are? Or do you do know the exact group of customers who are most demanding?
Starting with the 80/20 Principle, you’ll be able to identify these groups of customers. Data mining doesn’t have to sound geeky when you know that the end result is list(s) of customers you know what to do with.
Geo-locate your profitable customers
If 80% of your revenue comes from only 20% of your customers, chances are that your maximum revenue also comes from a specific geographic local (no matter how global your business is).
Particular geographic markets turn out to be more profitable for you than others. Identify or geo-locate your most profitable locales.
When you do, you can focus more on markets that matter. Your ads could be custom-made for these markets and you can even choose to dedicate more resources for these geographic locales.
Dig into the 80/20 layers
Perry Marshall wrote the definitive guide for sales and marketing by squeezing all that the original Pareto’s principle had to offer in his book 80/20 Sales and Marketing.
In his book, Perry Marshall writes the real power of 80/20 rule is in the layers.
So, there’s 80/20 for something. Then there’s 8/20^2, and then there’s 80/20^3.
Each of these layers is a source of leverage. In terms of ratios, this is how it plays out:
80/20 = 16:1
80/20^2 = 250:1
80/20^3 = 4000:1
80/20^4 = 65,000: 1
80/20^5 = One million to 1, and so on.
You’ll narrow down. You?ll squeeze. If you can identify what works for you, leverage is the key. Find who your customers are and how much they are willing to spend on you.
The layers within 80/20 helps you get there.
Fire Those Who Don’t Fit
Finally, there’s the need to cleanse your business of whatever doesn’t work. The 80/20 doesn’t concern itself with ‘average’. The power curve that comes from 80/20 focuses on the ability, the alpha, the A players, and the winners.
For all your customers who don’t fit into this, you?d do better to fire them.
Why spend any resources on 80% of your customers who don’t contribute to even 20% of your revenue? What’s the fun in that?
Think about it. Did you ever apply the 80/20 Principle to your business? If so, what did you do about it?
Niraj is the founder of Grexit, an app the lets you share Gmail labels with other Gmail users. Niraj works on programming, customer support and sales, and also contributes to design and UI. He?s a fusion music aficionado, loves to play the guitar when he can.
6 Responses to “How to Use 80/20 Principle To Get To Your Best Customers”
Great article!…Keep posting Daily
I concur that 80/20 rule works however, those who contributed the 20 should never be looked down on
Definitely a good thing to focus on those who are generating the money for you. Most people probably tend to focus on that 80%, but if you focus on those who are taking action you can probably end up making more money and saving a lot of time. Great post.
Agreed this can be a very powerful approach; typically what also holds true is that 20% of your content gets you 80% of your traffic.
Just 20 percent of the clients help in creating 80 percent of the income. This standard is created and exhibited in a methodical manner by Richard Koch. He clarifies the intricacies of the rule as well as goes a stage ahead by clarifying the reasons that make this standard work.
80-20 : my golden rule. Lets you focus on what matters for the majority, get a product to market quicker, and deliver incremental improvements to your product or service. It’s also aligned with the “Kaizen” approach used by many forward thinking companies.
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