WHEN VILFREDO PERETO noted, in 1906, that 20 per cent of Italy's population owned 80 per cent of the country's property, he had no way of knowing how widely his observation would apply to the world of economics, and to businesses. Since then, the Pareto Principle, or the 80-20 rule, as it is usually known, has proven sufficiently flexible to turn up in all kinds of business scenarios and has become an accepted part of global management thinking. Thus, we hear that 20 per cent of a company's employees produce 80 percent of its results and, with suitable modifications to fit different areas or industries, the list of examples goes on.
However, one of the most important applications of the rule is that 80 per cent of an enterprise's revenue comes from 20 per cent of its clients. If you accept that - and the consistency of those proportions turn out to be uncanny – then every company should try to understand as much as possible about the top fifth of its customers and listen closely to everything they say. Of course, that does not mean disregarding or undervaluing the rest. But there is no escaping the fact that the leading 20 per cent ultimately determine the success or failure of your product, service, sales and strategies and, therefore, whether your company stands or falls.
To obtain the necessary range of information and opinion, it is not enough simply to track monthly figures or lines on graphs. Instead, successful businesses conduct a complete and continuous analysis of their best customers to understand everything from who they are to what really motivates their choices.
Just consider that even industry giants such as Boeing and Airbus spend millions of dollars learning about the changing needs of airlines and the travelling public. Other big names, such as Pepsi, Nike and Procter & Gamble, conduct endless focus groups to gain new insights into consumer behaviour. And with the latest “big data” analytics, retailers are putting more infrastructure into tracking what their customers do online and in the store, in order to target promotions and recommendations as efficiently as possible.
In essence, though, all these efforts are no different from the owner of the corner shop asking if you like the selection of wines, or whether your newspaper was delivered on time. The principle is just the same: wanting to know more about the customer as a means of offering a better product or service that will increase revenue.
There are thousands of possible ways of analysing key clients, but three of the most important are:
Segmenting the customer base The first step in the process is to be realistic about which individuals or companies can and will buy. Then dividing these existing clients into clear groups according to their relative rank allows you to focus on those that will give the greatest return. This entails nothing more than deciding who is an A, B or C customer, in line with your own preferred criteria. Decisions about which clients fall into which categories are usually quite straightforward, but should not be based solely on one measure, such as sales revenue generated during the previous 12 months. Although this is a good starting point, other factors to consider include net profitability, strategic value, presumed potential, and ease of service.
Another way to segment the customer base is by considering what "stage of life" the buyer has reached. This method works well for business-to-consumer companies which can define different client groups by age range, spending priorities, shopping habits and brand loyalties. Factors related to stage of life have an effect on purchasing patterns for everything from consumer durables and home entertainment to financial services and travel. The categories used can run from young singles to married with children and "empty nesters".
A third approach is to focus on consumer preferences and behaviour. Some online retailers are able to segment customers in extremely precise ways, such as how Netflix assigns users into at least 1,300 different categories based on their viewing history. Depending on your business model you likely do not need to be as thorough as Netflix. The main point is that segmenting your customer base simply makes it easier to position a brand or product effectively and to build the loyalty of companies and individuals within that specific segment – especially useful where your top customers are concerned.
Understanding needs and drivers The next step is to find out all you can about your key customers. John Pierpont Morgan, the American financier, believed that people do things for the real reasons and the right reasons. So, if someone was deciding to buy, the "right" reason might relate to price, timing or quality, all perfectly valid. However, the real reason people buy is often based on emotional factors such as pride, ego, fear, greed or love. That is why companies spend so much time and money on developing brands which, they hope, will create an "emotional connection" for the customer.
For instance, when choosing to stay at a five-star hotel, the rational drivers influencing a guest's decisions might be location and amenities. The emotional ones, though, could be the feeling of comfort, a sense of luxury, or the prestige and self-esteem that comes from being able to afford it. Any successful business will understand that its own customers also have right and real reasons, and will cater to them accordingly.
Developing a customer contact strategy When devising a plan of action to achieve business objectives, it pays to have clear strategies for addressing the needs of distinct customer segments. It is also important to balance the interests of shareholders and clients. Otherwise, there is a risk, on the one hand, of pricing yourself out of the market or, on the other, of cutting margins too fine.
One approach in developing a contact strategy is to emphasise deliberately the differences between customers, depending on their level of spending and their value to you.
A good example of this is the airline industry where the more you pay, the better the service.
If you fly first class, there is a wider seat and more of everything, and people soon become minutely conscious of the distinctions that separate one class from another. It goes further, of course, with reward programmes, upgrades, special lounges and other privileges, all designed to create multiple grades of contact and denote relative value.
The direct opposite is to simplify and, basically, to treat all customers the same. The best known example of this strategy is McDonald's, where you get what everyone else can get, and no one much cares who you are. No express queue, no need to explain exactly how you like your hamburger prepared, no reserved corner table and no fuss or bother.
What this shows is that there are no set rules for running a successful business and building an enormous customer base. Ultimately it is a combination of art and science, but one thing is certain, you should always be supremely aware who your top customers are - in terms of market segments or individuals - and never neglect their requirements.
The needs and preferences will change and indeed can be led in new directions by various marketing initiatives. But whatever happens, the chances are that the top 20 per cent of your customers will continue to generate around 80 per cent of your revenue. And if that is the case, then it may well make sense to spend 80 per cent of your time on that 20 per cent of the client base.