Not all customers are created equal. If you apply the “Pareto Principle” to your sales department, you’re likely to make two observations: 80 per cent of your revenue comes from 20 per cent of your customers and 80 per cent of your sales are generated by 20 per cent of your sales team.
The above ratio varies by industry, and for some companies, the concentration of results is extreme: 0.5 per cent of car rental customers rent some 24 per cent of cars; the top 5 to 15 per cent of long-distance callers make up to 60 percent of all long-distance calls; at some banks, the top 25 to 30 per cent of customers account for every nickel of profit.
In high-transaction businesses — financial services, retail and travel, for example — it’s important to efficiently allocate sales, marketing and customer service resources to improve relationships with the most important customers.
Your long-term success hinges on strengthening the loyalty of these valuable customers . In fact, some companies have even adopted a policy of “firing” their least profitable customers and found a significant increase in both the corporate bottom line and their employees’ satisfaction.
Here are four principles to make your staff smarter and more successful at increasing your revenue stream:
Principle 1: Pamper Your Top Customers
This will pay dividends in the long run. For example, preferred customer packages at a hotel could include fast check-in, rooms based on past preferences and other perks. Customers at a service station who buy a certain amount of gasoline a year might be offered a free oil change. This 20 percent group is most likely to recommend your business to family, friends and colleagues.
Principle 2: Know Your Real Estate
Focus on the areas of your business that produces the most sales. Take a suggestion from McDonald’s: Founder Ray Kroc pared the restaurant’s menu down so that the restaurant offered only what sold. That let McDonald’s focus on quickly serving just what customers wanted.
Principle 3: Target Your Marketing
Some advertisements just don’t pay off. In fact, eighty percent of your new leads probably come from 20 per cent of your advertising spending. Direct mail has a broad reach but often winds up in the trash these days. So target your top customers with media ads, e-mail alerts and Internet leads. Look into push technology that takes advantage of personal digital assistants (PDAs).
Principle 4: Work Smarter
Solve the 20 per cent of problems that cause 80 per cent of your troubles and you’ll see a large return. And small problems might just solve themselves when the bigger pieces are in place. Establish specific sales goals, plans for reaching them and clear responsibility for achieving them. Base the rewards, including commissions, on results.
Without a strategy for concentrating on your top clientele and putting the rest on the back burner, you could be spinning your wheels to meet the demands of the most troublesome, least profitable customers.
Of course, you can’t ignore 80 per cent of your clientele. But you can decrease the amount of time and effort you spend on customers who aren’t motivated to buy.
This doesn’t mean you should forget them, but if you’re going to focus on your top customers, you need to find the extra time somewhere.Try to keep your entire customer base motivated — and informed — with newsletters, brochures and e-mails. Offer incentives to come back. And be sure to notice when some of those customers drift into the top 20 per cent. Although they don’t belong to your elite, they have potential.
The Pareto Principle In Action
Vilfredo Pareto was a 19th-century Italian economist who discovered that 80 per cent of the world’s wealth belonged to 20 per cent of its population. In modern business, the 80/20 rule is applied in a variety of situations. For example, 80 per cent of:
- Company problems come from 20 per cent of troublemakers (people, machines or situations)
- A manager’s time is paper work, 20 per cent managing.
- Customer problems come from 20 per cent of customers.
- Personnel problems come from 20 per cent of employees.
- Your results will come from 20 per cent of your effort.
Joe Truscott has been assisting small business owners for over 30 years with many suggestions and sales plans to increase their annual sales.
If you would like to engage Joe Truscott with respect to the above or any other income tax matters, please contact Joseph A. Truscott, Chartered Accountant at 905-528-0234 ext: 224, or email Joe at email@example.com.