The New 80/20 Rule in Customer Satisfaction

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In business, there’s a concept called the Pareto Principle, commonly known as “The 80/20 Rule.” The Pareto (or “Pareeto” as some pronounce it) Principle was named after Vilfredo Pareto, an Italian economist who observed that 80% of his country’s land was owned by 20% of the population. Since then, it’s come to represent the concept that a small population can produce the biggest share of just about anything – “a few are vital, many are not.”

How can the 80/20 Rule be used for customer satisfaction measurement?

At The Dunvegan Group, we repeatedly observe that 20 – 25% of a business’ customers represent 75 – 80% of its revenue. Senior executives see these numbers and believe they should be focusing their efforts on satisfying that 20 – 25% of their customer base. It’s a theory that’s applied in many businesses.

At The Dunvegan Group, we’ve seen many businesses focus on the customers that bring in revenue, often to the exclusion of the ones who bring in profit.

The new 80/20 Rule for customer satisfaction does not ignore the 80%

Let’s use the 80/20 split – 20% of customers producing 80% of the revenue. These top revenue customers do not typically represent 80% of the company’s profits.

Larger customers have more negotiating power, therefore volume discounting occurs. This means you don’t achieve your full profit margin with these top revenue customers. In fact, the top revenue customers may deliver very minimal profits.

The remaining 80% of customers are essential to meeting profit targets

It’s ironic, but larger accounts are often less profitable to a business overall. They can often be more demanding, more expensive to retain and leave you more vulnerable.

Some companies even use the ’superstar approach’, which is to focus their best efforts on the customers who represent the very top 20% of revenue, expecting to make these customers even bigger. The task of satisfying the largest, most and often most difficult accounts is given to a business’ top salespeople.

Over-investing in the 20% can negatively impact your business

It might seem like an ideal solution but, at The Dunvegan Group, we can see that over-investment in these superstar customers is often a game of diminishing returns.

This approach often leaves few resources to invest in potentially more profitable opportunities hidden in the pool of smaller revenue customers.

Focusing exclusively on keeping the 20% satisfied may lead to a decline in overall profits

Of course, it’s critical to keep these larger customers satisfied and retain their business. However, I believe it’s folly to ignore the remaining 80% that generate a smaller share of revenue, but likely result in more overall profit to your business.

Don’t forget that oft quoted study which showed that two thirds of customers who leave do so because they feel neglected or unappreciated. Likely the customers who felt neglected were among the less significant, potentially more profitable, customers who represent 20% of revenue.

There may be gems in your ‘less significant’ 80% – these companies could be growing or they could be splitting their business between you and your competition or they could be powerful advocates and allies as you seek referrals.

Imagine the impact on your bottom line when you invest in keeping these smaller, potentially more profitable customers satisfied – certainly worth considering don’t you think?

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