When a startup or an entrepreneur looks for customers, for the most part they look for ANY customer just to bring in revenue. Any customer that pays the bills is a customer that a new startup company wants. It’s all about generating sales, revenue, and ultimately profit. But then again, there is always a good customer, bad customer approach to your customers, customers that are more difficult than the others and potentially more costly.
Using the Pareto principle, we’ll see how to analyze your customer base, to find which customers are your most expensive or profitable to maintain. The Pareto principle is normally referred to as the 80-20 rule. For example, 80% of your revenues come from your top 20% of your customers, or the richest 20% of Americans pay 80% of the federal tax bill, or fixing the top 20% of software bugs that cause 80% of software crashes.
The Pareto principle is a tool to analyze data to find the sources of a problem and to determine the priority of resources to apply to the problem. Asking the right question is the start of good Pareto analysis.
In our example to the left, customers A-G shows a transaction count and you can see using the Pareto principle you see that almost 80 percent of the number of transactions come from customers A-D. But this also begs the question for more information: How much is the average sales per transaction and how much time to service your customer are additional data that needs to be examined? How much can you reduce your time and effort in handling a less than ideal customer? Is there something within your operational capability that can change your customer dynamics? Your first choice, in most cases, is to look inside your business data to find answers.
The next question is how much time and effort does it take to service your top 20%? Generally whenever you are looking at your customer base your worst customers probably will be in the bottom 80%. But not so fast, customer revenue is only one factor in determining business profitability, a customer’s expense, the time and effort it takes to service one, is equally as important. So it is the combination of both revenue and expense that will determine the Pareto principle used in analyzing your customer base and finding other solutions for your less than ideal customers.
No one wants to lose a customer or have to let one go to a competitor, but it is about being profitable as a business.
Once you have done the analysis, now is the delicate balance on how to handle a less than ideal customer. And that is for another blog post.
) to a guest blog post It’s the Numbers….Stupid! 3 Tips for Justifying Social Media Now and Beyond knowing numbers that affect your business and include social media.
