Leveraging the Pareto Principle for Fun and Profit

Though it may not be referred to specifically by business and marketing experts, the Pareto Principle plays a significant part in the advice they impart. The Pareto Principle says that for many phenomena, 80% of the consequences stem from 20% of the causes. Also know as the 80-20 rule, it gets cited in all kinds of business media. Interestingly, and in spite of its trendiness, the Pareto Principle really is a useful concept for a service business.

One of the applications of the principle says that 80% of a company’s revenues come from 20% of its customers. In other words, all customers do not have the same degree of impact on your bottom line. Some small portion—20% according to the principle—are far more significant to your firm than others.

This insight can drive a large part of your marketing program. The ways in which you care for the few customers who spend the most dollars will vary based on your particular style and the type of business you own, but no matter what the business, creating a marketing program that targets the top 20% of your list will generate new revenues in all kinds of ways, from increased purchases themselves to sending more referrals your way.

But here is an interesting number: In a survey of U.S. corporate marketing managers, slightly more than half of respondents said that they do not segment according to customer value. This implies that around half of American corporations don’t recognize that their customers are not all of equal value to them. I’ll bet that if we move down into the small-to-medium business sector, that portion increases by a lot.

That’s not good. Customer value needs to figure prominently in marketing strategy, especially in smaller companies. Resources are spread wider and thinner in small to medium enterprises, and every single marketing dollar has to produce the right result. Paying more attention to that top 20% of customers will produce far more right results than treating your list as one homogeneous audience.

Some corporations have mastered the art of cultivating their top customer echelon. Airlines are a prime example; their frequent flyer programs reward the people who buy from them the most, and go one step further by motivating these buyers to continue buying by offering attractive incentives for accumulating more miles with them. They also negotiate special rates with large corporations with vast travel budgets to motivate continued patronage.

How can you leverage the minority of customers who account for the bulk of your revenue? Here are a few ideas to spark your thinking:

• Offer extra services at no additional charge only to these top customers.

• Extend exclusive offers to this segment of your client base.

• Be a matchmaker by networking your top clients and referring them to each other.

• Extend more favorable fees or payment terms to this group.

• Send hand written notes to your top customers on occasion to thank them for doing business with you.

• Send them something special on a birthday, anniversary, or other special occasion.

• Email or snail mail reports or articles that you come across that you know will interest them.

Do some brainstorming of your own on this question, then implement marketing initiatives targeted at your top 20%. And lest you think that we are talking big bucks here, rest easy. It’s amazing what results you can produce with a hand written, snail mailed note, a tin of cookies, or Starbucks gift card.

Be creative, be communicative, be human in dealing with your most valuable customers, and you will reap bigger rewards.

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