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Looking For Growth – Pareto Your Customers

The Pareto Principle

The Pareto Principle is the theory that 80% of effects come from 20% of causes. When it is applied to business theory, people say that 80% of your profit will come from 20% of your customers.

Consider Profit but a Pain

So if you are looking at how to grow your business profitably, conducting research on the customers who make you the most profit seems like a sensible starting point. Now there are some important caveats to throw in here for example are client might be highly profitable but be a complete pain in the butt to deal with ( paying late, asking for lots of changes / modifications, leaving orders late and expecting immediate delivery) so these elements need to be taken into consideration.

Lets consider how to practically do this research / analysis

Looking For Growth - Pareto Your Customers

Action to Complete the Pareto Analysis

  • Write down a list of your “Top Ten” clients by profitability
    • Now for some this will be easy, they will have the accountancy systems in place to run a report and get this list in seconds
    • For others identifying the top 10 by profitability will be a more onerous task involving discussions with your accountant
    • For many “true profitability” will be incredibly difficult to identify
      • Many of the manufacturing companies I work with initially have no idea about the “real” profit they make when designing / manufacturing a new product. With design costs, research, additional production time just being lost within the system. This often means that a project that you thought would be highly profitable, simply ends up covering costs or losing money
    • Top Tip: Make sure you have accurate information available – its pointless working to get more customers who have the profile of a loss making customer
  • What characteristics do these Top 10 customers have in common
    • The amount they spend
    • Number of orders placed
    • Type of person you deal with
    • Type of products / services they are buying
    • etc
  • Talk to them
    • Don’t Email them
    • Don’t send them a survey (printed or online)
    • Talk to them, ideally face to face, with specific time allocated to an open and frank discussion
    • Find out about how they heard about your business / product / service
      • Now I know sometimes this can be difficult (especially) when they have been a customer for a long time, but its useful information to gain
      • For more recent customers, did they find you on the web, was it via a referral etc.
    • Identify how they use your product or service ( especially important if your product is sold through central procurement, so you sell the product but have no idea about the end application)
    • Ultimately we want to be able to be able to develop a profile for these customers

Now answer these questions:

  • What do they have in common?
  • Where did you meet them?
  • How did they find you?
  • Where can you find more customers like them?
  • Do you put in significant effort to acquire more customers like them?
  • Do you have similar clients in the pipeline
    • In fact do you have a sales pipeline
    • If you do have a pipeline, how do you manage it, do you have the CRM systems and processes in place
  • What actions can you take over the next 30 days to acquire a new customer like them
    • Note: recognising that some prospects can take months / years to nurture and develop before they can purchase, unless you start the process you will never complete the sale

In Summary : Looking For Growth – Pareto Your Customers

  • Identify your top 10 most profitable customers
  • Analyse them
  • Talk to them to accurately understand why they choose you
  • Research how to find more customers that fit this profile
  • Take Action – to start finding the “right” kind of customers
  • Don’t get distracted – other orders may be eating into your time and losing you money

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Looking For Growth - Pareto Your Customers
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