Most people have heard of the Pareto Principle, you know the one, the 80:20 rule. It applies to many, many situations including throughout the natural world. Many of us will have come across the Pareto Principle being applied to the world of business too. The context is usually something like 80% of our business comes from 20% of our customers. As a rule of thumb this works very well.
However, that rule of thumb is only scratching the surface because the Pareto Principle is what mathematicians call “fractal”. Don’t worry about getting you head around fractal, it simply means that the 80:20 principle can be applied repeatedly. So, the theory is 80% of custom comes from 20% of customers and 80% of that 20% comes from 20% of the 20%!
The effect is that an increasingly small number of customers provide an increasingly large proportion of sales. In the example shown above, the business has 31 customers and according to the theory the one of them will be responsible for the same level of sales as the next best two combined or to the 4th, 5th, 6th and 7th best customers combined or to the sales of the next best eight customers after that or to the sales of the final 16 customers.
In practice, the lesson to be learned from this, is that we should concentrate our efforts on finding and developing our best customers at, to a degree, the expense of our smallest customers – but always remembering that today’s smallest customer may become tomorrow’s largest one!
However, as well as applying the 80:20 principle to our customers it also applies to the markets that we are operating in. This is important because the market is, usually, far larger than our own customer base. This implies that the market will have a lot more customers in it that are like our best customers or even a lot more customers who are even better than our best customers!
Bringing in another famous mathematician, to keep Pareto company, we have Albert Einstein with his famous definition of insanity as doing the same thing over and over again and expecting different results. The outcome of all of this is that our market has many customers in it who are as good as or better than our best customers and that we should set our marketing plans accordingly. If we only market towards our average customers we will only get an average spread of customers!
It almost does not matter what business sector we are operating in. Even if we were to operate a greasy spoon café, there will be customers who are the “best” customers and there will be more best customers out there to attract in through targeted marketing.
Step one is to understand our existing customer base and the customers who make up our market. Step two is to understand what is different about existing and potential best customers. Step three is to differentiate our offer to reflect those differences and step four in to find appropriate marketing messages and channels to target more best customers.
In this game, knowledge really is power!