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Pareto: Customers in the Spotlight

The Pareto Principle suggests that 80% of useful results are generated by 20% of the total effort. In this issue, we want to take a look at how this principle applies to customers.
 
Do you regularly or periodically review the value of your customers in relation to the cost of serving them? If this is blindingly obvious and is part of your bread-and-butter work, feel free to skip to the next article. However, it may just be that you’ve become embroiled in sophisticated segmentations or analyses and haven’t really looked at the basics recently.
 
Set your target
In most businesses, the top 20% of customers will deliver around 80% of the profit or value. You can verify whether this is true for your business by carrying out a standard analysis of customer value by decile (the top 10% most valuable customers, followed by the next 10% etc.). Ideally, such analysis should be conducted to check customer value by channel, product, segment etc.
 
Once you know the main source of the value, you will be much better placed to ‘cherry pick’ to develop future business more effectively. You may find that you’re wasting resources (in terms of sales or retention initiatives) on areas that produce minimal real value. Particularly in difficult times such as the current economic climate, you need to streamline your efforts and invest in the most rewarding areas.
 
Take aim
However, you still need to be careful who and how you target:
  • There could be a danger that all areas of your business want to target your top customers – and they therefore end up bombarding them with communications and offers (possibly alienating them as a result).
  • You might find that you could derive more value from the next layer down - the ‘marzipan’ layer*. Is there real potential for serving these customers better or selling them more?
  • Alternatively, use your knowledge of your top customers to find others like them who would benefit from what you have to offer.
In recent times, we’ve hopefully learnt from the banking sector that any targeting needs to be sustainable. This means that you need to apply some longer term common sense alongside the short term cherry picking. But ultimately, the way ahead is still going to involve targeting – it’s just that it needs to be well informed.
 
Similarly, you can apply the Pareto Principle if and when you need to cut costs. Make sure that you do this wherever possible in your least profitable areas, whilst looking after your best customers.
 
* Term borrowed with pride from Andy Green of Reap Consulting.
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