How to Profit from Your Most Valuable Customers
By Elizabeth Rush Kruger
Who says you must treat customers equally? Research proves that some customers are more valuable than others. Would you like to maximize your profits by prioritizing your customers? This article answers questions, explains the 80/20 rule, outlines the process, and provides examples.
Answers to your questions
Why are some customers more valuable? They value your business more than other customers.
Is this true of my business? Yes, a universal law predicts the relationship of inputs to outputs.
Is it useful? Yes, businesses use the 80/20 rule to increase productivity, increase quality, and sales.
Can the 80/20 rule increase my profits? Yes, when you target your most valuable customers. How valuable are they? The most valuable 20% of your customers generate 80% of your profits.
How valuable are others? The least valuable 80% of customers generate 20% of your profits.
How do they compare? The most valuable customers are 16 times more valuable than others.
Can I grow my profits? Yes, by targeting your most valuable customers and similar prospects.
What are the steps? Distinguish your top customers, serve them, and recruit others like them.
How many recruits? You maximize profit by replacing less valuable customers with better ones.
What are the results? If all customers are highly valuable, expect your profits to quadruple.
Is this taught in college? Yes, business professors are adopting my book Top Market Strategy.
Explanation of the 80/20 rule
The 80/20 rule summarizes the stable relationship of inputs and outputs. Vilfredo Pareto predicted that the top 20% of any inputs will produce 80% of the outputs. Researchers, mathematicians, and physicists confirmed that this relationship is universal. Thus, the Pareto distribution is as useful as the normal "bell-shaped" curve.
Pareto was well-respected, but his student, Benito Mussolini, was despised. The allies conquered Mussolini and suppressed knowledge of the Pareto distribution.They judged that skewed results are unfair, undemocratic, and immoral. "The top 20% households should not own 80% of the wealth!" But suppressing this universal law does not change its results. But all can use the 80/20 rule for good. Learn how you can use the 80/20 rule to improve your profits:
Step 1: Distinguish your most valuable customers
The first step is to identify your loyal, heavy users. Heavy users buy large amounts while loyal customers will pay high prices. Sort your customers by their potential profitability. The top 20% of your customers are most valuable to your business. Compare them to the bottom 80% of your customers. Discover what makes them tick. Who are they and where do they live? What do they want to buy and why? How and when do they want to buy it? Profile the distinguishing characteristics of your most valuable customers.
Step 2: Target them with a top market strategy
Now delight your most valuable customers with your marketing strategy. Offer what they want, when and where they want it. Facilitate their buying process and appeal to their motivations. Expect the top 20% to generate 80% of your profits from customers. In contrast, the bottom 80% will generate only 20% of your profits. Concurrently, cull your less valuable customers from your business. Discourage them by automating interactions or by penalizing small transactions.
Step 3: Convert top prospects into valuable customers
The last step is targeting prospects similar to your top customers. Obtain a list of prospects with the same distinguishing characteristics. Use your top market strategy to convert them into loyal, heavy users. Replace your less valuable customers with these highly valuable new customers. The 80/20 rule predicts that your profits from customers will quadruple.
Example of a large manufacturer
Harley-Davidson demonstrates how to prioritize your most valuable customers. Willie G. Davidson and some employees saved the motorcycle brand from bankruptcy. These investors noticed that their most valuable customers identified with the Harley mystique. These loyal heavy users enjoyed "freedom from the cage." They loved customizing retro American "bikes" and socializing at sponsored events. Consequently, Harley-Davidson delighted them with a top market strategy. But this strategy discouraged "Hellís Angels" bikers through high prices and slow delivery. These strategic decisions magnified Harley-Davidsonís profitability.
Example of a small service provider
Trust Point Insurance partners with four agencies in the southeast. Consistently, 20% of their customers generated 80% of their profits. The partners decided to implement a top market strategy. They automated interactions with the bottom 80% of their customers. The partners also increased commissions from 20% to 25%. Thus, representatives earned the same commissions from their remaining customers. This motivated representatives to convert similar prospects into valuable customers. Subsequently, their revenue increased four-fold, commissions increased five-fold, and profits almost quadrupled.
The top 20% of your customers are highly valuable. So target them with a top market strategy. Distinguish your top customers, target them, and recruit more of them. The 80/20 rule predicts that your profits from customers will quadruple.
Betsy Kruger has managed marketing research projects for numerous clients. She also taught 14 business subjects in well-respected colleges. Her mission is to empower prosperity, one business at a time. She speaks, consults, and writes on 80/20 topics.Professors are adopting her book to enrich business courses. Check outTop Market Strategy: Applying the 80/20 Rule. Visit betsykruger.com or see her teaching at segmentmarket.com.