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Applying the 80/20 Rule to Your Customers

April 17, 2010

from Trent Hamm, American Express Open Forum, April 2010

As I discussed recently, I’m a big believer in the 80/20 rule.  Over and over again in life, I’ve seen it pop up and I’ve witnessed many ways in which applying that rule has led directly to success.  Today, I’m going to look deeply at the 80/20 rule and how it applies to one’s customers.  First, though, a refresher.

What is the 80/20 rule? The 80/20 rule, also known as the Pareto principle, simply means that roughly 80 percent of the effects of anything you might be doing come from 20 percent of the causes.  For example, 80 percent of your sales are likely generated by about 20 percent of the items you carry or services you offer.

Let’s look at three ways the 80/20 rule might be applied to maximize your customer base.

Don’t be afraid to be selective when it comes to your customers. 80 percent of your customer service effort is spent on only 20 percent of your customers.  If some of those “needy” customers are customers who don’t contribute financially to your business in an extensive way, don’t be afraid to make their customer service needs a lower priority.  You need to provide “A” service to your “A” customers, but if you burn all of your energy providing exceptional service to your “B” customers, you may let down your top customers.

Know who your big spenders are. Hand in hand with that, 80 percent of your business comes from just 20 percent of your customers.  In other words, you have regular spenders – people who use your business consistently and spend money there consistently.  You’ll also have a lot of very irregular spenders – people who visit your business once or on a very irregular basis.  Identify the regulars and get to know them.  The stronger you make that relationship, the more likely they are to not only stick with you in the face of competition, but also refer you to new customers.

Take care of your big spenders. So, let’s tie those two points together.  If one of your “big spending” customers comes in with a special need, don’t be afraid to go the extra mile to help them out.  In other words, focus on matching 80 percent of your customer service effort to the customers who provide 80 percent of your business.

Keep track of what advertising and promotion actually works for you. 20 percent of your promotion work nets 80 percent of your new customers.  How do you know what promotions work best for you?  Have promotions that require the customer to bring the promotion to you.  For example, use a flyer that requires the flyer to be brought to your business.  Use a “coupon code” that only appears in a certain place.  Try several things, then match the results of those campaigns to your spending on them.  The stars will emerge, and those stars should light the way to future success for you.

Remember, you maximize your success if you match your effort to your results.  That’s what the 80/20 principle illustrates – quite often, your effort doesn’t match where your results come from.  Correct that, and you’ll find success.

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