The 80% rule has been circulated for a while now. It states that 20% of your customers drive 80% of your business. There’s other interpretations of this rule, like:
- 80% of customer service issues are generated by 20% of your customers
- 80% of time is spent in vain, while 20% is actual productive time
- and others…
All in all, there is in fact a big gap between good customers and not so good ones.
There’s other letter-grade classifications of customers. You classify these customers by different criteria or a combination of these. Some will include:
- Overall economic contribution – the total amount of profitable business your organization has with this client
- Actively using products/services – is this customers actively using your organization products and/or services
- Vertical Industry – is this customer in the one of the core vertical industries your organization is servicing
- Geographical Location – less important in a service business, but potentially very important in a physical product business
- Distribution Channel – primarily for a physical product business, is this customer a distributor moving a lot of your product, a wholesales or a retailer moving very little product
- Customer Status – actual customers, past or current, a prospect, etc.
I’d like to expand on that by looking at a three-dimension classification here. Taking into consideration the above 80/20 rule, some of those 20% of customers will be your A customers, the A’s. These are customers that produce a lot of recurring business, the business is on cruise-control, requires constant and quantifiable effort, and produce good revenues. Your organization does not have any unforeseen spikes, and is totally reliable. The amount of risk is minimal with these customers, as the overall stability of the relationship makes this a very productive model.
Out of the remaining 80% of customers, you really have to determine which are the B’s and which are the Y’s. Let’s see how to define these categories.
You B customers, the B’s, are customers that you have a somewhat reliable relationship with. Your risk is higher with these customers for various reasons. Some of these could include either a relationship following a sinusoidal pattern, or customers where you’ve encountered some problems in the past, but they’ve been favorably resolved, customers that might not generate as much profit as the A’s, but you’re not incurring a loss either, etc. Each business has specific classifications, and those classifications should be taken into consideration.
Overall the B customers are the rest of customers that are not A’s, but are still good customers. Effort could be spent on this category of customers to see if some can be transformed into A customers for your business to grow successfully. Various processes can be used here, but primarily it comes down to building a better trust relationship with these customers, becoming an essential supplier or advisor to your customers, and streamlining the operations in order to reduce risk and produce better results.
Finally, the remaining customers from these 80%, the ones that can not be classified as B’s are the Y’s. We call then the Y customers because of the question we need to ask ourselves:
Why do we have these customers?
Unless a customers in this category is a strategic investment (see my previous article on “Should you take on a project as an investment?”), these are typically customers that create more headaches that productive results. You either loose your shirt of these customers, or you barely break even. These customers tie up your support lines, taking from the time you should be spending with your A’s and B’s. They are late on payments, creating a cash flow problem for your organization. There are lots of reasons to classify a customer in this category, but the idea is that your business could be better off without these customers.
Just like an under performing employee, a Y customer is not worth having.
A good Customer Relationship Management (CRM) system, properly configured for this analysis, will make it so much easier to classify your customers. Can your CRM do that for you? Do you even have a CRM? Is this a metric included in your platform and actively monitored?
I would very much like to hear how your organization is managing their customers. If this article helped, please leave a note below to get in touch.