Maximum Profit Per Customer And The 80/20 Rule

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In a recent blog post, Don Peppers of Peppers and Rogers writes:

“If your customer base has an 80-20 skew, then somewhere in [a] stadium full of 50,000 customers there are about 80 customers who do about 2/3 the amount of business done by the other 49,920 customers put together! So rather than paying to put your ad message in front of all 50,000 customers with a series of stadium-wide initiatives, why wouldn’t you invest a little of your marketing budget first just to find out where in the stadium these 80 people are actually sitting? Then you could hire some folks to go up into the stands, sit down next to each one of these 80 customers and buy them a hotdog and drink. During the conversation that follows, be sure to tell them: “If you can tell us what it takes to make you happier with our brand, that’s what we’ll do for you…” By the end of the game you will have sown up 40% of the market, and the entire process was conducted out of your competitors’ view. This is the real power of direct, interactive marketing. One-to-one marketing. Customer-centric marketing.”

My take: This advice ignores two concepts that elude too many marketers — “maximum profit per customer” and “jobs the product accomplishes.”

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I don’t dispute the possibility that 20% of your customers account for 80% of the profit. And I’m willing to loosen my grip on reality long enough to allow for the possibility that maybe all it takes is a “little of your marketing budget” to figure out who those 20% are.

But the idea that you can simply ask those customers “what would it take to make you happier with our brand” and then go out and do it and see profits increase is a couple of steps off the deep end.

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Let me give you a real-life example of why the advice in the article is wishful thinking.

Thanks to the breakfast-eating habits of myself and of two of my daughters, the Shevlin household purchases 125+ boxes of Quaker Oat Squares (QOS) on an annual basis. I can’t imagine that there are too many other households in the country crazy enough to do the same. As a result, grant me the delusion that I’m among the 20% elite that accounts for 80% of the product’s profits.

If the product manager for QOS found out who I was, sat down for a chat with me, and asked “what could we do to make you happier with the brand?,” I would probably reply: “Nothing. Now give me a free box — or better yet, ten free boxes — and go away.”

The point is, I’ve probably maxed out on the number of boxes of QOS I’m going to purchase on an annual basis. My reason for not buying more has nothing to do with dissatisfaction or unhappiness. In other words, I have maxed out on my individual profit potential to Quaker.

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However, if the product manager asked “when and where do you eat the cereal, and who in your household eats this stuff?,” what s/he might learn is that me and 2 of the 3 princesses eat the stuff (one princess is out of the house already, and the Mrs. doesn’t eat QOS, and never will), and that we eat it for breakfast, snacks, and dips.

But by talking to the other 80% of customers (who Peppers implies marketers shouldn’t focus on, or at least place lower priority on), the product manager might discover that many of them only eat the cereal for breakfast, and never thought about using the cereal for snacks and/or dips. 

In other words, there are  other “jobs” for which his/her product can fill.

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Here’s a scenario for the profit impact that focusing on the 80% (and not the 20%) and on “jobs to accomplish” (and not “happiness”) might have:

         Before: After:
Customer Profits Profits
1        $1      $15
2        $1      $1
3        $1      $1
4        $4      $15
5        $4      $4
6        $4      $4
7        $8      $8
8        $8      $8
9        $30     $30
10       $30     $30
TOTAL    $91     $116

In the “Before” scenario, 20% of customers — two “elite” customers (#9 and #10) — generate $30 of profit per year, and account for 2/3 of all profits. If these two customers have maxed out on their profit potential, however, no amount of marketing effort will produce incremental revenue or profits (in fact, additional marketing to this segment would end up reducing their profitability).

If, however, by identifying new “jobs to be accomplished” with the non-elite 80%, two customers’ profitability could be raised to half of that of the elite customers, profitability could grow by ~30% (it’s dependent on which customers’ profitability increases).

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The big variable, of course, is how much would take in marketing investment to identify the gap (in jobs accomplished) and change behavior.

If we can assume that it would take “little of the marketing budget” to identify the 20% elite, would it really cost that much more to survey a sample of the other 80% and find out how they differ from the elite group in their use of the product?

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There are two key takeaways here:

1) Allocating marketing dollars to customers whose profit levels have maxed out isn’t just a waste of effort, it erodes profitability. High profit customers may be in this category because previous marketing efforts have been successful. Maintaining high levels of marketing investment may have diminishing — or no -returns on investment. 

2) Happiness (or satisfaction, or GOD FORBID, likelihood to refer) is a silly thing to focus on if your objective is to grow revenue and profits. Attitudinal measures may help you understand “how you’re doing” but they’re not that good for helping you determine “what to do.”

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