Marketing Maven Test:

Q: According to the 1990 study by Frederick Reichheld in the Harvard Business Review, a 5% increase in customer retention can increase profitability by what percentage?

     A. 5%

     B. 10%

     C. 25% or greater?

A: Click here for the answer

Your Customers - Why the 80/20 Rule Doesn't Work

by Paul Schwartz

Remember Pareto's Rule, also known as the 80/20 Rule?  When applying it to business and your customers it means that typically 80% of your business (volume, revenue, profits, etc) comes from 20% of your customers.  Unless you take the time to really know and segment your customers this rule can lead your business down a dangerous path, lined with some unpleasant consequences.  In our last issue we looked at ways of segmenting your customer base, and one way is profitability.  Let's concentrate on it here since this is so critical to just about every business's survival or success.  

Once you segment by profitability you may find that the 80/20 Rule doesn't apply.  For many organizations it is really the 120/20 Rule that is applicable, where 120% of your profit comes from 20% of your customer base.   Wow, great, hey wait a second!  Why is that?  It happens because most businesses will find that there is a segment of customers that actually end up costing them money and generating no profit.  If you have done your segmenting properly you can identify them.  But what do you do with them now that you know who they are?

Do you just cut them off?  Fire them as customers and hope they go to your competition?  Our last Marketing Maven test told us that consumer recommendations are the most trusted so be careful about just cutting off customers.  Find ways to treat these unprofitable customers differently.  To get you started here are some ideas:

1. To get started, you need to have some form of dialogue with these customers to understand why they do such little business with you.

2. Gather more information about them (preferences, lifestyle, habits, etc) to make your offers more relevant to them.

3. Offer an incentive to increase their level business.

4. You may find the quality of your products or services was an issue - let them know the changes you have made and invite them to give you another try.

5. Decrease your cost of service by giving them a less costly level of customer service. 

There are many options available.  You need to be able to identify these customers and have a dialogue with them to understand the issues.  From there the next steps will start to be clear.  Need help implementing the dialogue with customers?   Please contact us for an introductory discussion to see how CONGRUITY can help provide insight into your customers and improve your business's profitability.  Please visit us on the web at www.congruity.biz

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