The 80/20 rule often comes in handy for prioritising scarce resources.
Look in your CRM database and you’ll likely find that roughly 80% of your revenue is driven by roughly 20% of your customers. Therefore, it follows that you should focus your limited time and budget on that critical minority of customers.
It’s the smart thing to do. Except when it’s not.
This is a viewpoint by Daniel Hughes, head of data science international, DigitasLBi.
No one would fault you for doing the obvious thing. In fact, most leaders regardless of industry make the same choices and direct investment toward the small minority of customers that are most important to the business.
The trouble is this is not necessarily a recipe for growth. It may instead be a strategy for minimizing risk by protecting existing revenue at the expense of growth opportunities.
Growth sometimes necessitates risk. It means doing things differently.
If your desire is to innovate. If you want to be a disruptive force in your industry. Try inverting the 80/20 rule by figuring out what to do with the 80% of your customers who account for only 20% of sales.
Here’s an example from the hotel industry. We delved into the CRM databases of multiple hotel brands to understand how many guests had booked only once in the past five years. In every case it was a big number. We looked deeper.
The average value of those stays was higher. They were more likely to have booked direct than through a third party. And they were less likely to have booked under a discounted corporate rate.
Many even enrolled in the loyalty program. They behaved like model customers. The only problem is they booked only once and never returned.
With these additional facts what strategy would you pursue?
It’s not a trick question.
There’s a strong argument for either course of action. One could double down on the most profitable segment to find new ways to delight those customers and ensure their continued loyalty.
Or one could take a contrarian approach to figure out how to reengage those previous guests with whom your brand had only a one-night stand.
What was different about the journey of these customers? What changes to the experience could you make to win them back? What would your business look like if it pivoted the model entirely around the needs of the 80%?
We did some back-of the-envelope calculations to estimate the financial impact of convincing even a small percentage of these guests to return one more time.
The resulting impact for a single year was greater than the sum total of growth over the preceding five years. This is not to suggest it is easy to do. But certainly, it is worth reconsidering the conventional thinking of the 80/20 rule.
This is a viewpoint by Daniel Hughes, head of data science international, DigitasLBi.
Hotel image via BigStock.