Making it to Your Top 20
The 80/20 Rule states that 20% of the things you do produce 80% of the results you get. Of course the numbers can vary – but the principle of the rule never changes: Most outcomes (results) are produced by much fewer numbers of inputs (work.) In other words, much of what you’re doing isn’t really amounting to much. And this can be especially true for small business owner who spend most of their time with a select group of customers they’ve misidentified as their “best customers.”
Your Top 20 Money Makers
If 20% of what you do in your small business gets you 80% of your results, spending time nurturing relationships with the top 20% of repeat customers is a no brainer.
However, if the criteria used to identify that Top 20 can be skewed – and not in your favor. The most direct route seems to be to follow the numbers and use how many dollars repeat customers have brought in over a specific period of time. Makes sense: Pay attention to the most profitable customers is a great strategy to continue to be profitable.
But will you make more profit? Not necessarily.
Just as you should never compete on price alone, you should never place a value on your customers solely based on how much they buy from you. Instead, there are a few other variables you should to add to the equation.
(Customer Purchases) + (Referral Purchases) = More Sales
One of the most unfortunate victims when it comes to attracting new business is small business owners have a tendency to neglect the power of referrals to increase profit. If you’ve made a customer happy that’s a really good time to ask them to refer someone they know who’d like to made happy as well.
However, when it comes to figuring out who among a small businesses’ repeat customer base belongs in the Top 20, too often those customers who may be buying less but referring more aren’t counted among that select group. Big mistake as 80% of your new business should be coming from existing business.
A customer who doesn’t make the Top 20 as far as how much they personally purchase but refers can be much more valuable to your business than one who does. You’ll notice the word “can.” This means you’ve got to do the work to figure out whose those customers are. You’ve got to keep records of who refers who and what that translates to in sales.
(Customer Purchases) + (Customer Participation) = More Sales
Sometimes it isn’t easy to be able to establish an exact number when figuring out who your Top 20 is. For example, you’ve got a customer who certainly doesn’t make it to the Top 20 as far as how much they’re buying from you, they may have referred a customer or two, but nothing phenomenal – but that customer regularly and positively participates in your social media marketing. You know who we’re talking about. If you put up content on Facebook that customer comments, likes, and hits share. They make positive comments on your blog posts. In other words, this customer acts as a “Goodwill Ambassador” and actively markets your business for you by increasing your reach – and, because they’re already a customer, that reach is most likely extending to the very customer profile your marketing to.
(Customer Buying A Lot) – (Their Regular Unreasonable Demands) = Less Money
Not all customers who make it the Top 20 based on how much they buy from you deserve to be there. As a matter-of-fact, they can actually be costing a business more money than they’re bringing in. Now, this doesn’t mean that each and every customer “complaint” doesn’t need to be professionally dealt with, nor does it mean that “demanding” customers don’t deserve great customer service. However, small businesses need to be watchful that they are actually receiving a positive return from high-spending, over-demanding customers.
Sometimes high-spending customers grossly over-estimate their value to your company. Thinking that a business “depends” on their business can lead them to behave in ways that lower their value. For example:
They expect to receive special terms that other customers wouldn’t dream of asking for. Sure, giving a customer special terms can make good business sense. However if they also meet any of the criteria below…
They don’t pay on time (most of the time.) Revenue is great, but revenue you can count on is better.
They take up too many man hours. It’s possible that you “job cost” other projects and activities in your small business – if the job cost of a customer is more than they purchase, they don’t belong in your Top 20.
**They seem to think that their purchase level has bought them decision-maker status. When a customer represents too large a percentage (some would say 30% or more) of total sales it can spell real trouble for a small business owner. Even if the customer doesn’t insert themselves into the business inappropriately, a small business owner can find themselves dependent on the sole strategy of keeping that customer – and that is a strategy that can result in missed – not more – opportunities.Last modified: February 28, 2013
This story is part of our Small Business Corner, a peek into the life and trials of small business owners.