The 80:20 Rule (or Pareto Principle) states that 80% of your revenue comes from 20% of your customers.
Think about this for a minute.
What if you could drop 80% of your customers, and still make about the same revenue? What if you could use your freed up time to increase the business you do with your top customers and focus on recruiting more top customers?
Let’s explore how you can put this powerful principle to work for your business.
Identify Your “A” and “B” Customers
Every year, evaluate your customers. Separate them into buckets: “A” customers and “B” customers.
Your “A” customers buy more frequently. They place the highest value orders. They probably bought from you more recently. They’re usually good communicators. They might even be brand advocates, sharing your business with their network.
“B” customers generally don’t help your business grow. When you serve them, you lose money, break even, or earn just a little profit. Overall they require too much effort relative to the prices they’re willing to pay.
Almost everyone can think of at least a few “B” customers. But think back to the 80:20 rule…. The difference between your “A” and “B” customers is probably much greater than you realize!
It’s up to you how deep you want to get into calculating a customer’s profitability. If you want to just estimate, that’s ok. If you want to be objective, add up the total revenue you earned from a customer in the last year, then subtract the costs related to serving that customer. If you have thousands of customers, you could use data analysis or analyze random samples from different groups.
While we love data, don’t forget qualitative factors. If a customer pays well but is horrible to work with, that could affect your employee engagement and morale. Despite the data, you might have to put a customer like this in the “B” bucket.
Action Step: Make a spreadsheet or a handwritten note, and place your “A” customers in one column and your “B” customers in another. If you’re fairly confident (or just short on time), it’s ok to use your memory instead of running calculations.
Let Go of Your “B” Customers
After you identify your “A” customers, you need to let go of your “B” customers so that you can focus on better serving your “A” customers and finding more “A” customers. This might seem hard to do, but it is essential to growing your business.
There are a number of ways you can let go of a customer.
You can raise your price quotes, so long as your quotes are not standardized.
You can slow your email response times, so long as this doesn’t result in bad customer reviews.
Finally, you can try the “thanks but no thanks” approach.
The next time a “B” customers takes up too much time, complains, talks rudely, or requires excessive support, just follow these 3 steps.
- Thank them for trying your product or service.
- Depending on the case, let the customer know that their request is outside your scope of services, or that you don’t accept customers treating your representatives a certain way, or simply apologize that your company was not able to live up to their expectations.
- Finally, recommend another business or product that might be more helpful to the customer.
If a customer requires more support, are they a “B” customer?
Just because a customer needs more support than others, doesn’t necessarily mean that they’re a bad customer. In fact, their requests can give you insights that will help you improve your product or service.
In determining whether they’re an “A” or “B” customer, you need to focus on whether they are contributing significantly or insignificantly to your bottom line. If they’re not helping your business grow, then consider letting them go.
Can you keep legacy or prestige clients?
Some customers might not appear profitable but could help your business in other ways. You have to know your top business goal and prioritize objectives that will help you achieve it. If your top priority is profitability, then losing your “B” customers as soon as possible will usually help you in the long run.
What about startups?
If you’re keeping a customer because you believe they will grow in the future, it’s a bit like owning their stock. Would you choose to buy that stock?
Take some time to talk to the entrepreneur. Make sure you believe in the company’s vision and that the company’s timeline for growth is short enough to be worth the investment.
Do More for Your “A” Customers
The most important action you can take to retain your “A” customers is to continue providing them with the quality of service they have come to expect.
Make sure you have your “A” team working on your “A” customers, and keep their projects or deliveries high-priority. Never de-prioritize loyal customers just for shiny new ones who might not stay with you for so long.
Remember, focus on wallet share before market share. Studies show that a happy customer is up to 14 times more likely to buy from you than a new customer!
To add even more value for your “A” customers, try giving discounts for bulk orders or referrals. This encourages the behavior that’s growing your business!
Some businesses designate VIP programs to give their best customers a sense of exclusivity, achievement, and personal connection. VIP perks can include special event invitations, free swag, product samples, bonus points, and birthday or holiday gifts.
Do you have relationships with corporate clients? If so, you can find great business gift ideas online.
Maybe you don’t have $20 to send gifts? No need to go in debt over gifts! Just write an appreciation email, or (much) better yet, send a handwritten letter or postcard.
If you live in the same area, treat your “A” customers to lunches or drinks. Away from the office, you can get to know each other better. You might even find opportunities to ask them about their business challenges. Later you can suggest ways that your company can help solve the problems they mentioned.
Action Step: Reflect for a moment. Who is your absolute best customer? How can you make him or her feel more appreciated today? Pick one suggestion from this list and try it!
Find More “A” Customers
Before you can find more “A” customers, you need to analyze your existing “A” customers.
Start with who, what, when, where, and why.
- Who are they? Take notes on their demographics like age, gender, education, and socio-economic group.
- What products are they buying? Do they seem sensitive to price points?
- When are they buying? How long is the sales cycle? What factors drive them to close a sale?
- Where are they from geographically? Where is the point-of-sale (online, in-person, at certain types of events)? Where are they hearing about your products and services, and where are they building relationships with you (social media, your blog, somewhere locally)?
- Why are they buying from you instead of your competitors? What psychographics—interests, values, attitudes, and personality characteristics—motivate them?
For every customer on your “A” list, jot down at least 5 observations. If you have time, go through the whole analysis process on each “A” customer.
If your customers fit a similar profile, then you’ve found a “target market.” (This is worth celebrating! A lot of businesses never realize what their target market is, so they spend years just getting by financially. By taking the time to figure this out, you’ve taken a major step towards making your life easier and your business more profitable.)
Now ask yourself what you can do to find more people in your target market:
- What offers can I make?
- What pricing can they afford?
- What channels should I use to reach them?
- What channels should I use to build relationships?
- How can I close the sales cycle faster?
- How can I communicate value or build trust with them?
- What kind of communication style worst best?
- Who do I know who knows people in my target market? What can I do to encourage them to refer customers to me?
Be open minded. For example, you might realize there are new products or services that “A” customers need that you could provide.
Be tactical. Check what your competitors are doing for ideas. For example, you might notice that your competitors build trust with your target market by posting testimonials from people who match your target market’s exact demographics. Why didn’t you think of that before? Doesn’t matter. That’s a great idea to steal!
When you’re finished brainstorming, underline your best ideas. Next, write out a short list of the first 5 actions you want to take and prioritize them from 1 to 5.
You know what to do next. Get started! Take action on your new to-do list.
As you bring in more “A” customers, you should see exciting improvements in your company’s profitability.
Is it ok to have two or three target markets?
There’s an old proverb: “The person who chases two rabbits catches neither.”
Before you focus on multiple target markets, focus on one. Work until you build extraordinary success with that one. Then, if you’d like to pursue another, use your profits and your business systems from your first success to go after it. Over time, you can build your business to sell to multiple target markets.
Use the 80:20 Principle to Save Time
Don’t forget the “20” part of the 80:20 Rule.
80% of your revenue comes from the work that you spend 20% of your time on. But only 20% of your revenue comes from the work you spend 80% of your time on.
Ask yourself, how can I reduce the time I spend on activities that consume 80% of my time but don’t deliver big results?
The point of the 80:20 Rule is focus. So after you brainstorm how to target more “A” customers, take a moment to analyze what other activities you’re currently doing that are not helping you reach “A” customers.
Maybe you’re selling a product that “A” customers don’t buy. Maybe you’re running ads that “A” customers don’t click on. Maybe you’re spending too much time producing and selling inexpensive services that your “A” customers don’t buy.
You need to cut these activities from your schedule in order to free up time for the new activities you now have on your to-do list.
Be Patient and Continue Using the Process
Focusing your target market can take months.
You’ll likely test a variety of ideas only to find that a few work. Your early tests can give rise to new ideas that you want to explore next. That’s ok!
When you replace a “B” customer with an “A” customer, you might see a big difference, or you might see a small difference like an extra $100/month. Over time, the extra $100/month can have a significant impact on your income! As you continue replacing more “B” customers with “A” customers, you can achieve even bigger results.
Once you find the best market for your business, check each year to make sure that you’re still pursuing the right customers. To make sure you don’t forget, you can put an annual recurring event on your calendar. Perhaps every January you can do a reassessment.
Working with the right customers will not just make your business more profitable. It will also make working at your company happier and healthier for you and your employees.
Your “B” customers who you let go will probably find services that are better suited to their needs.
Most importantly, you’ll enjoy serving “A” customers who truly appreciate and value your service.
Get started today by making a list of your “A” and “B” customers, and discover what a difference awesome customers can make for your business.