How to Identify the 80/20 Customer

Feb 16, 2012

In the early stages of your business strategy development, and throughout the lifetime of your business, understanding and learning from your customers through simple research is key to being successful. Business strategy and development hinges on your customers knowing and loving what you do.

The 80/20 Rule

Many businesspeople have heard about the 80/20 rule, which states that about 80% of company sales come from about 20% of its customers. Also known as the Pareto principle, this rule was names after the Italian economist Vilfredo Pareto who observed in 1906 that 20% of the Italian population owned 80% of Italy’s wealth. Looking further, he notices that 20% of the pea pods in his garden accounted for 80% of his pea crop each year. You can chalk this up to coincidence or sheer luck, but either way. Pareto applied this rule to pretty much everything in his life.

You can argue that the 80/20 rule is totally hypothetical, but when it comes to business, this simple hypothesis can help you identify who your most profitable customers are.

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Find Your 80/20 Customer in 3 Steps

  1. Determine your total sales for last year or last quarter.
  2. Run a report of total sales by each customer or account.
  3. Identify the individual customers who account for the biggest percentage of your sales by dividing the total customer purchase into total sales for the period.

These remaining customers are your best few. They’re the ones that trust you, enjoy your products and services, and are most likely to buy from you again and again. According to Howard Hyden, founder of The Center for Customer Focus, your existing customer base is five times more likely to buy from you than go to an unknown company. Did you know that these 20% who’ve purchased from you once will buy from you again? What’s the catch? You have to ask them! One-fifth of your customer base is just waiting for you to follow-up with them and offer them something new. Talk about leaving money on the table!

These customers aren’t only key to your growth but also the lifetime value of your business.

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