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Pareto says not all customers are equal

27th Jun 2022
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The 80:20 rule, also known as the Pareto principle, has been around for decades from a marketing perspective. It still remains one of the most important principles of marketing. 

Understanding Your Best Customers Is The Key To Success.

The classic use of pareto in marketing is that 80% of sales come from 20% of customers. I’m yet to come across a client that doesn’t have some form of Pareto, the ratios may differ slightly, but the basic principle remains. A small number of customers generate the vast majority of a company’s current and future sales and profits. Ignore this small number of customers at your peril and if you lose a significant number of them your business may never recover.

So, the key question is who are these critically important small number of customers or to put it another way who are your best customers? And what should you be doing with your best customers?

How to identify your best customers

‘Best’ is a subjective term and it is up to each company to decide what their definition of best customers will mean. One way to do this is to look at the last 12 months of customer spend data and to break it down by deciles of customer volumes by spend. So, you’ll have the top 10% of customer who have spent the most right the way through to the bottom 10% of customers who have spent the least. For each 10% of customers you’ll have their corresponding % of total spend. This is really just the starting point, from this point onwards it is a case of playing around with the data to decide what your version of 80:20 is.

You might also want to include an element of LTV (Life-Time Value) into your calculations or include elements such as AOV (Average Order Value) or frequency of purchase. You may also decide to include some sort of indicator of future potential spend. Every company will be different based on their customers and market characteristics.

What insight can you generate on your best customers?

Once you have settled on identifying who your best customers are the next step is to understand as much as you can about them. They are very unlikely to be a homogenous group. So, it is imperative that you learn everything you can about them and where appropriate separate them into sub-groups.

Who are they in terms of profiling? For B2C customers you can look at demographic data such as age, gender, location, lifestage, income etc and for B2B customers you can look at industry type, job title, turnover, employee size etc.

What do they buy? What products and categories do they purchase?

What are their key metrics? Look at the retention rates, how long they have been a customer, frequency of purchase, average order value etc.

How engaged are they? Do they respond to your CRM activity? How often are they on your website? How often do they redeem incentives?

How much more could they buy from you? Your best customers are likely to be your best source of additional revenue. You need to try to establish what SOW (Share Of Wallet) you have with them and how much headroom for more spend do you have.

And with all of this insight that you generate you need to be comparing your best customers to your average customer. How different are your best customers to your typical customers?

What do you do with your best customers?

As I said earlier it is highly unlikely that your best customers are a homogenous group so it will be difficult to treat them as a group to communicate with per se. But you may decide that you want to provide bigger rewards or incentives to them. You may decide that you want to give them exclusive content or invites to events.

The one thing you must do with you best customers is to measure their performance on an ongoing basis and look for any sign that their spend is dropping or that they might be churning. You should look to set up trigger programmes to head off any possibility that you are losing them as a best customer.

Can you find more people that look like your best customers?

Understanding your best customers should be critical to any future prospecting and existing customers growth activities. From a prospecting perspective you should be trying to recruit new customers that look like your best customers or who have the potential to become a best customer.

Similarly, you should be trawling your existing customer base to find those customers who have the potential to become a best customer but who currently are infrequent or average spenders. You should consider developing bespoke communications with appropriate offers and incentives to nurture these customers through to becoming a best customer.

If you’d like to talk about best customer marketing, we'd love to hear from you! Please visit our site at https://www.relevanz.co.uk and let us know how we can help!

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