Why More Startups Should Embrace the 80/20 Rule Early On
When it comes to showing customers some love, startups that want to grow sustainably should focus on the ones who love them back.
Anyone who’s worked in the startup world long enough knows the allure of saying yes to every opportunity that comes your way, especially when a company is in its infancy. This is especially true when it comes to taking on new clients. It’s why 44 percent of companies say they focus more on acquisition than retention. After all, a new client is new income, so why wouldn’t that be a good thing?
While this may seem like sound logic, it often doesn’t align with reality. Acquiring new customers is six to seven times more expensive than retaining customers, and the success rate of selling to new customers is significantly lower.
Beyond this, however, is the question of whether your time and resources are being wasted on clients who don’t currently — and may never — generate enough revenue to make it worth your while.
To put it bluntly, not all clients are created equal. Focusing valuable time and resources on the wrong clients can actually slow your growth. The real challenge for many businesses is to figure out which clients to prioritize and which ones to turn away — or even fire.
The 80/20 Rule for Clients
Rather than collecting clients like coins, most startups would benefit from hand-picking clients that have the potential to bring the most value to their company. A good way to go about this is to follow the 80/20 rule, also known as the Pareto Principle.
Essentially, the principle states that 80 percent of your output tends to come from only 20 percent of your inputs. This observation is attributed to the Italian philosopher Vilfredo Pareto, who noticed that 80 percent of the healthy peapods that came from his garden grew from only 20 percent of his pea plants.
While that may seem like a rather esoteric origin for a popular corporate principle, businesses really do find that leveraging this rule effectively maximizes results in many areas. For example, focusing the majority of your energy on the 20 percent of your clients who bring in 80 percent of your revenue or, conversely, eliminating the 20 percent of customers who are causing 80 percent of your challenges can significantly improve your bottom line.
The 80/20 rule is especially significant for startups. Gartner Group found that 80 percent of a company’s future profits are quite literally derived from 20 percent of its existing customers.
For startups that have difficulty just staying afloat, future profits can seem like a pipe dream. However, you’ll see returns from focusing on top customers faster than you may think.
My company grew 75 percent year-over-year when we focused on growing our most scalable existing clients instead of spinning our wheels to find new ones. By prioritizing — and giving significant attention to — our top three clients, they grew by two times, four times, and 10 times, respectively. These three clients alone represented 63 percent of our revenue, while our top 10 clients made up 88 percent of our revenue.
As evidenced by our growth, the easiest way to get bigger can be as simple as hyperfocusing on your most valuable customers, partners, and opportunities. This gives you time to leverage your strengths, build competitive advantages, and correct course whenever you need to pivot. If you’re distracted by smaller or time-consuming customers, you can’t give your best and most scalable clients the attention they deserve.
Putting Theory Into Action
How do you actually put the 80/20 rule into practice, especially if you don’t yet have an overabundance of clients? There are a few things to remember that will help you stay on the path to healthy growth, instead of becoming bloated.
1. Analyze your current revenue distribution.
Where is the majority of your money coming from? What areas have the potential for greater profit, and what areas have most likely topped out?
Your revenue model will change and become more complex the bigger you get, so this isn’t a one-and-done kind of thing. Reassess your revenue stream on a regular basis to identify your new top players and those who have the potential to bring in more.
2. Focus on adding value.
Once you’ve identified your most valuable and/or scalable customers, put your efforts toward adding as much value as possible to those relationships. Improving customer retention by as little as 5 percent can result in as much as a 95 percent increase in profits. Bet big on your heavy hitters, and create a scenario where you become indispensable.
When you treat your top clients like VIPs and overdeliver, they’ll not only become more loyal, but they’re far more likely to reward you with bigger opportunities.
3. Eliminate the dead weight.
This may sound harsh, but getting rid of customers who cost more than they contribute is more common than you may think. Sprint, for instance, has been known to cut loose customers who make an overbearing number of support calls, costing the company more than the monthly fees those customers bring in.
Don’t be afraid to fire the clients who might be a drag on your bottom line. Follow the same procedure you would to find your top 20 percent and take a look at your bottom 20 percent. Focus especially on clients who are difficult or require a lot of time and attention.
While it’s tempting to say yes to everyone, less really can be more when it comes to clients. Growth isn’t about the number of clients you attain — it’s about the revenue you achieve. If you apply the 80/20 rule, focus on your essential clients, and eliminate the waste, you’ll be 80 percent of the way to increased growth and profits.
Drew Kossoff is an entrepreneur, conscious capitalist, and the CEO of Rainmaker Ad Ventures, one of the fastest-growing digital media buying agencies in the U.S. With more than $100 million in media buying experience, Drew and his team specialize in delivering high-volume email, display, and native advertising traffic for a growing number of the internet’s top direct response marketers. Rainmaker Ad Ventures’ proven track record of success combined with a commitment to a triple bottom line (i.e., people, profits, planet) has helped it earn a spot on the Inc. 5000 list of fastest-growing private companies in America for three years in a row.