There is an inherent imbalance in the scheme of things in the world. And this imbalance is captured very well by 80/20 principle. Ever wondered why you wear only 20% of yours clothes 80% of their time with just 20% of their friends? Or the more popular example of unequal distribution of income across the  world – 20% of the world population holds 80% of the wealth. It is the 80/20 principle in play. 

But this rule has extreme relevance in business. Most business would agree that 20% of their products bring in 80% of the revenues 80% of the organisation’s salary budget goes to 20% of the executives, 80% of the quality problems can be assigned to 20% of the causes and 20% of the customers bring in 80% of the revenues. 

The 80 and 20 are not a hard and fast set of numbers but the basic idea is to understand the imbalance between the scheme of things and use that to your advantages.

One ready application to this rule is Customer Relationship Management. Everybody knows how much more difficult it is to get a new customer than to retain an existing one. Wireless companies in the US are spending more than $350 to acquire one customer but 40% of their customers  defeat every year. This has made business extremely difficult for them. Not only do they have to replace the defeated 40% but also add more to show some growth. With these conditions, most wireless companies would disappear by way of consolidation. Another example of expensive customer service is the banking industry. Most customers cost more to serve than the returns on their deposits. Banks are figuring out how to serve their more valuable customers and retain them and cut the cost of serving the less valuable ones. CRM seems to be the answer and it is helping. But the cost of a CRM deployment is exorbitant and prohibitive for a small company.

The 80/20 principle is a solid start for any company. One look at your customer file would separate your customers into the most valuable 20% and the other 80%. Most companies do not understand this way they do disservice to those who deserve most attention and waste excessive time on less value adding customers.

This is not discrimination against certain set of customers. It is just proportional distribution of organizational effort. Companies that have realized this have been better able to retain their valuable customers.

Small companies do not have recourses to invest in CRM solution and then to maintain them. What they need is a simple but yet effective way to differentiate between their values adding and less value adding customers so the they know where  to concentrate their limited resources and energy . Identifying the most revenue generating  20%  customers would immediately reduce the task to a more manageable level. Companies can further analyses these 20% customers to know more about what they buy, where they buy, how much do they pay etc. Based on these answers, companies can then decide on their distribution, product development and pricing strategies.

Companies commit blunders by assigning their sales person, advertising and distributing equally to all markets. This has also created incentives issues with sales people who get assigned to the less valuable 80 % customers. Financial services companies here in the US have recognized this difference between customers. They assign their best brokers and financial advisers to their top clients. This has helped them to retain their profitable clients. There are standard service available to the other 80% customers.

There is no technology investment required for some basic analysis on customer file which can unraval tons of  knowledge about customers. Simple mean and standard deviation of a normally distributed set of customer data would give important leads on pricing strategies. It would seem that big companies already analyses their customer files and use the data for customer service. But that’s surprisingly not the case. Multi-million dollor companies often fail to do this simple analysis. But they have money to spend on CRM products.For small companies who need a simple but effective substitute to CRM intelligence, the 80.20 principle is the way to go.