In a nutshell (and from a business point of view) – the 80/20 Rule specifies that 80% of your revenue comes from 20% of your customers. I’ve talked about the 80/20 rule quite a few times over the years as it is something I’ve found to be valid regardless of the company or industry I find myself in.
Often called the Pareto Principle after an Italian economist, the 80/20 rule while an estimate is generally remarkably accurate and can be postulated in a variety of areas – For example, you could:
- speculate that 80% of your calls come from 20% of your products or issues
- understand that 80% of your revenue comes from 20% of your clients
- reflect on the fact that 20% of your bugs impact 80% of your customers!
By focusing your efforts on the 20% you will see a dramatic decrease in your calls and cases (or again from a business perspective a massive increase in your revenue!).
However – an amendment to the 80/20 rule is the 80/20/30 rule.
What is the 80/20/30 rule?
This addition is something I stumbled across years ago and every now and then it comes back to me. To be honest, that is very much why I’m putting it down now as I’m sure it’s a caveat that many of you are not familiar with either and it is something I believe is worth knowing.
The 80/20/30 rule expands on the 80/20 rule. While it agrees that 80% of your revenue comes from the top 20% of your customers … the important point it makes is that … 80% of your cost will come from the bottom 30% of your customers.
This means that most of your costs; for time, resources, support, attention, etc… is wasted supporting the 30% of your customers who are not generating any revenue for you, or at least not enough to give you a return on your investment!! This is obviously not where you want to be spending your time or resources.
Now, how do you determine if this is truly the case for you and I’m not just making it up? Well, this is where a CRM system comes into play. Perhaps a tool like HubSpot or something similar. By tracking the volume of cases and issues for your clients and correlating that against the revenue earned, you can easily see if this ratio applies to your business also. Once you’ve come to this realization, well then, it is incumbent upon you to “sort” your customers into different tiers based on these metrics and target your efforts appropriately to maximize your revenue from each group.
Your Top & Middle Tiers
Your top 20% should get a significant focus of course as they are bringing in the bulk of your revenue.
The next big 50% chunk should get some attention too as you want to transition these customers up into the next level … These are the clients you want to establish a partnership with as a trusted consultant and provider of solutions.
By getting to know these clients better, as well as their business’ needs and requirements, you will develop a customer relationship that will last for years. This connection will generate on-going revenue for your business and continued solutions for your client, hence a life-long customer relationship. Think about customer journey maps and other similar tools here to understand where the disconnects are happening and how you can remove pain points to improve their overall customer experience.
Perhaps something worth exploring is chat and chatbot solutions to help improve overall throughput within your team? These types of solutions are often available with CRM systems but can also be purchased separately through a specialist chat solution provider. In this case, they can be integrated into your CRM solution through APIs ensuring you do not lose visibility of your overall customer interaction.
Your Bottom Tier
But with the bottom 30%, you might want to change your strategy as they are costing your business money vs. generating money for you. Look at options like service agreements where they pay per call or perhaps even an annual support fee which would balance out the cost of their frequent service requests. NO ONE likes to lose a customer, but sometimes it just doesn’t make sense to keep them all either!
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