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The 80/20 Customer Profitability Rule

The 80/20 Customer Profitability Rule

Beyond • November 21, 2013

Have you ever performed an analysis of your customer base to determine who are the highest repeat customers, which ones rarely do business with you and which ones are the most valuable and profitable? In performing analytics and customer analysis for at least 60% of the Fortune 500 companies in the United States, I have found a very revealing and astonishing pattern in this customer analysis that holds true company after company. This is pattern is as follows: 80% of all your company profits come from ~20% of your customer base Take the following chart from one of the top US banks that shows 20% of their customers are responsible for 82% of their profitability and that a full 47% of customers are actually unprofitable and are not worth having as customer as each customer transaction costs the bank more than it is worth (each customer interaction actually drives the bank further away from profitability): When I presented the bank with this customer profitability analysis, they were amazed as the results and of the customer distribution. Why are these insights and analytics so important and what might the bank do with these insights? These insights are key in developing a customer relationship management (CRM) program that is tailored and specific to each customer group. Ask yourself the following questions: Do you want treat your best and most profitable customers different than your unprofitable customers? Do you want to develop special customer programs so that the 20% most profitable customers are not stolen away by competitors? Do you think your most profitable customers want to be shown appreciation for their repeat business in a way that makes them feel welcome and special? The answer to all three questions is a resounding YES! Armed with the above insights and analysis a company can start to architect customer intimacy and loyalty programs such as the following: Offer most profitable customer special discounts or accelerated loyalty rewards earning rates Conduct special top customer, by invite only, appreciation events Deliver occasional special top customer gifts or recognition when they interact with you in-person or on-line Invite your top 1-3% of customers to participate in an invite only customer advisory board or insights group event every year at an exciting destination where most or all expenses are paid for by your company Bottom Line is that, through customer analytics, you will find that not all customers are the same in terms of profitability (the 80/20 rule), so it makes no sense whatsoever to treat all customers the same. Through a robust customer insights program you will then be able to leverage these insights and develop a sophisticated and custom loyalty and retention program in order to accomplish the following: Keep your most profitable customers and make want to remain a loyal customer Impede your competitors from stealing your highest profitability customers (the 20%) Develop programs to mitigate expenses when dealing with your least profitable customers (more self-service, helping them ‘discover’ lower cost competitors, offering more limited services, etc.) (the other 80%)


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