Why you should challenge the 80/20 rule.
What is it?
The 80/20 rule originates from the Pareto principal which states “for many events, roughly 80% of the effects come from 20% of the causes”. Translated to the business world, this is often used to describe where an organisation’s sales originate from. In other words, the rule suggests that 80% of your sales will originate from 20% of your customers. This means that 80% of your entire customer base will be low spending, low frequency customers. This of course would increase the cost of sales ratio as the ROI is less of that then your repeat customers.
Who uses this?
So given this ratio, who actually uses this within an organisation? Well marketing and sales functions for a start! If you can understand which is the profitable segment of your customer base, then of course it makes sense to start targeting your marketing and sales efforts towards this segment. This has a knock on effect to the messages that you release to the market, which of course will be highly engineered to the segment, in turn bringing you more revenue…in theory.
So what is my problem with it?
My problem with this rule is that this rule is often employed without the in-depth analysis that is required, after all this has a large impact on how an organisation goes to market. Take a beer organisation as an example, if you employee this rule it suggest that you have a very loyal customer base. However the reality from my analysis of customer data from Trade Promotions would suggest that in fact sales revenue is extremely elastic to price of not only the brand in question, but also competitor brands. This completely trashes the 80/20 rule, and if you think about the beer industry, a small segment of individuals are only really loyal to premium brands or if they are core beer fans who follow organisations such as BrewDog.
So straight away we have identified a market which doesn’t abide by this rule. The next flaw is that this rule encourages organisations to massage a specific customer set and drive account penetration. On the surface this is a good account management however I fear that it takes the focus away from one very important thing; bringing in new business from new accounts. This is especially important with changes times which brings not only new customers, but different customers that could be key to your survival.
In my opinion, a smarter tactic would be to recognize that you may have a loyal customer base who need to be looked after, but also bear in mind that your organisation needs a clear route to obtaining new customers. Otherwise you will never uncover new potential that could be sitting in the environment outside of your segment of focus.
How should you go about it?
Perform a proper analysis on where your current sales are coming from and your customer base. Too many organisations don’t do this. It is far easier to focus on existing accounts as it keeps the cost of sales low as well as having a higher likelihood of achieving a sale. In the long term however, it may have knock on effects into the growth of your organisations.
Consider a solid recruitment strategy — by this I don’t mean hiring new individuals into your organisation, but more how you can recruit more customers into your brand. If you can nail down a number of efficient mechanics to acquire new customers or accounts into your organisation, then you are protecting yourself in the long run.
Don’t be afraid of a marketing strategy that does two things — targeted marketing is of course the Holy Grail in marketing, however you should not be afraid of generating separate marketing activities which achieve separate objectives. Yes of course you will need to be careful that you don’t distribute mixed messages down the channel but you can be successful if your marketing department is aligned with the overall objectives and is very organised.
Yes the 80/20 rule probably can provide some good advice as a starting point when designing how you go to market but every organisation is different. Time invested in working out which customers you should interact with and in what way is time well spent. Don’t abide by a rule that generalizes all organisations…