The Pareto Principle, also known as the 80-20 rule, is derived from and named after Italian economist, Alfredo Pareto. In 1906, he observed that 80% of the land in Italy was owned by 20% of the population. I would expect that this principle also applies to Australia and New Zealand.
In business, the most common application of the Pareto Principle is to realise that 80% of your business comes from 20% of your customers. Some business owners may not know this but even those that do, tend not to apply this rule sensibly. If you had this knowledge, it would be logical for you to stay in touch with those customers that represent 80% of your business. What does that entail?
This may involve some of the following:
- Regular communication, especially two-way, where you actually talk to or write to your top 20% of customers to find out their needs and wants from your business
- Deliver exceptional service to these customers and give their orders top priority
- Market to these customers regularly in an effort to not only retain them as clients but ideally, get them to buy more from you in terms of higher volumes of products and services or different products and services
- Make your top 20% of customers feel special by making special offers to this group that are not available to other customers
- Thank these customers regularly with gifts, thank you notes, greeting cards and words
- Use your top customers as a source of getting new business through their testimonials and referrals.
Instead, what most business owners do is the opposite. Much time is focussed on getting new customers or looking at those low volume and low profit customers. Business is not a democracy. All customers are not equal. You have the right to discriminate in favour of those customers that are the most profitable to you.
Most businesses are less efficient than they should be. Again, the Pareto Principle can explain this. 80% of your results will most likely come from 20% of your efforts. As a business owner, it is your job to find this waste and eliminate it and make your staff more productive. This application of the 80/20 rule is more relevant to owners than it is to employees. It is the owners that waste time on less important matters. The important matters are marketing and customer service.
One of the least understood concepts in business is that not all customers are worth keeping. Some will be unprofitable. Others will create problems for you. The Pareto Principle would state that 80% of your problems will come from 20% of your customers. Well, at least some of these customers should be let go. Let them be someone else’s problem.
Measure your marketing and know your figures.
In particular, find your top 20% of customers? What do they have in common? What products do they buy? What marketing do they respond to? What is important to them? Then, work on keeping them and getting more of them.
This last paragraph is particularly relevant for Bartercard members. If your business is anything like mine, then at least some of your top 20% of customers will be Bartercard members. It has been my experience that Bartercard members tend to be big spenders. This means that several Bartercard members are in my top 20% of customers or, if you prefer, are Category ‘A’ customers.
This has two implications for Bartercard members. Firstly, you want to nurture these Category ‘A’ customers, including these Bartercard members, by thanking them, communicating with them regularly and making special offers to them.
Secondly, the first rule of customer acquisition is to search for new customers that have characteristics of your Category ‘A’ customers, i.e. those in your top 20%. If one characteristic of some of these customers is that they are Bartercard members, then it stands to reason that you could use your Bartercard membership to acquire more of these Category ‘A’ customers to your business.
Remember that your Category ‘A’ Bartercard clients are most likely to recommend other Category ‘A’ clients to your business, helping you to tap into a new cash market.
Ian Renton is the owner of four businesses, Australian Credit Stationers, Australian Christmas Cards, Renton's Labels and Renton's Printing. His businesses provide account stickers, Christmas stickers, corporate Christmas cards and e-cards, corporate birthday cards, thank you cards, calendars, fridge magnets, custom labels and general printing to thousands of businesses in Australia and New Zealand.
Ian's ideas on debt collection whereby the next sale is just as important as the collection of the debt have been featured in The Australian Financial Review.
Ian is the author of Debt Collection Made Easy, an easy guide to collecting your money quickly and efficiently as well as a thorough look at the local court system and how it can be easily used to collect money yourself at minimum cost to you.
His next book about Customer Retention is due to be published in 2014.
Ian Renton is also the writer of his fortnightly ezine, SmallBizTips, now read by approximately 10,000 subscribers and his monthly printed newsletter, Customers For Life.
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