The 80/20 rule is the key to maximizing your company’s marketing ROI. Before we see how that works let’s look at how companies typically do marketing.
Every company does some marketing whether they realize it or not. Otherwise they would not have any customers. Some of it is haphazard and some planned as a separate activity for the company.
What most companies fail to recognize is that first and foremost they’re in the marketing business. Without customers or clients, or whatever you want to call them, you’re not in business. And how do you get customers or clients? You market your business to them.
For many business, their single largest expense is marketing to get new customers or to keep existing customers. Since it is such a significant expense you would think that their marketing campaigns would be very well organized to maximize the use of each marketing dollar. But that’s frequently not the case.
Consider the following factors:
- Not all customers are equally important to your business. The customer that buys one low cost item each year is clearly less important than a customer that buys a medium to expensive item every month on average. Obviously, the second customer is at least 12 times more important to your business than the first.
- Marketing experts have estimated that it costs about five time as many marketing dollars to get a new customer as it does to keep an existing customer.
- Customers who have bought from you once are likely to buy from you again.
Let’s combine these three factors and apply the 80/20 rule to them.
Analyze your sales and determine which customers make up 80% of your sales. If your business is like most businesses, you will find that 20% of you customers generate about 80% of your sales. These are your high value customers and clearly your most important customers. And they will probably continue to buy from you.
Determine which customers take up most of your time but spend very little with you. Once again, if your business is like most businesses, you will find that about 20% of your customers take up most of your time and that this 20% is part of the 80% that do not create most of your sales. These customers are clearly not very important to your business and may actually be hurting it because the time you could be spending with your good customers is being wasted on these customers.
Then, finally, after making the above analysis and considering that it costs 5 times as much to get a new customer as it does to retain an existing one you’re in a position to formulate an effective marketing plan
Study the 20% of your customers that produce 80% of your sales and try to identify what characteristics separate them from the 80% that contribute little to your sales. These are the types of customers that you should spend your new customer marketing dollars on. You do need to get new customers if for no other reason than to make up for the natural attrition of your high value customers that occurs in all business. But you want new high value customers not time wasters.
A significant portion of your marketing should be spent on nurturing your existing customers so that they will continue to buy from you.
And what should you do with the 80% of your existing customers that create very little sales for you? Well, you can just keep them without spending any money or time on them and take whatever business they do produce. Or, you might want to consider telling your time wasting, very low sales customers that you have changed your business methods (and you have if you do what we’re talking about here) and that you can no longer provide them the level of service that they need. In other words, fire them.