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The Customer Bell Curve

Written by: Russ Lombardo

Article Overview: We are hearing more and more about Customer Retention these days which is absolutely critical to the survival of our business. However, this doesn't mean we have to retain every one of our customers nor treat them all the same way. In fact, this article will discuss how to segment your customers and focus on the more important revenue generating clients.

The Customer Bell Curve

We are hearing more and more about Customer Retention these days which is absolutely critical to the survival of our business. However, this doesn't mean we have to retain every one of our customers nor treat them all the same way. In fact, this article will discuss how to segment your customers and focus on the more important revenue generating clients.

We've all heard about the 80/20 Rule which states that 80% of your revenue comes from 20% of your customers. Unfortunately, this rule is often times too true for many businesses which is not very good since it could put us in a volatile situation. All that has to happen is that we lose one or two of our top customers and there'll be a huge negative impact on the majority of our revenue. So, we don't want to put all our eggs into the proverbial basket. Most companies are aware of this and at least try to avoid it.

But, have you heard of the 80/20/30 Rule? That's the 80/20 Rule with an additional twist - 80% of your COSTS come from 30% of your bottom customers. Notice that this isn't your top revenue generating customers, but your bottom non-revenue generating ones. This means that most of your costs; for time, resources, support, attention, etc, is wasted supporting the 30% of your customers who are not generating any revenue for you, or at least not enough to give you a return on your investment. So why are you spending so much time on your non-revenue generating customers? Is it possibly because you don't know who they are?

Let's review what this model looks like and identify a huge opportunity for your future business as well as your relationship with your clients. If you can imagine a classic bell-curve, picture 80% of your revenue coming from 20% of your top clients, depicted by the left side of the bell curve. Likewise, 80% of your costs are going to 30% of your lowest customers, depicted by the right side of the bell curve.

This leaves 50% of your clients in the middle (the high part of the bell curve), who may not necessarily be your largest accounts but neither are they draining your costs with no return. These clients do generate revenue for you and are, in fact, the life-blood of your business - They are your Hot Spot. Therefore, this middle position of the bell curve presents a huge opportunity in which you should focus. They represent 50% of your clients and they are worth a fortune to you if handled properly.

You obviously know the 20% of your top performers so it's easy to continue working on developing those relationships. The challenge is to identify the bottom 30% that are costing you so much in time, resources, support, etc. By collecting information about your clients; such as purchase history, support costs, sales calls, and other related activities and metrics, you will be able to determine which customers are, quite frankly, draining you dry.

Once you identify the bottom clients you need to stop spending so much time with them. That may be hard to do since your sales people may have long-standing relationships with many of them, or the client may feel they have a good relationship with you. But you have to bite the bullet and focus on the 50% clients. One way to start "moving away" from the 30% group is to offer them a service agreement where they pay an annual fee for support from you. Or charge them for each support call. Or offer a self-service web site where they can find answers to their questions for free without wasting your time. Or simply stop scheduling sales calls with people who purchase nothing from you, and never will. You know the types -- they keep meeting with your sales reps and holding out a carrot that they will eventually buy something, but keep delaying the decision for some unsubstantiated reason. Or they keep calling with questions and problems and you give them free support, but in return they haven't purchased anything from you for the past 2 years and show no signs of buying anything soon, either.

Now what do you do with the 50% Hot Spot clients? This is where you focus most of your marketing and sales efforts. These are the clients in which you target your marketing campaigns. Depending on their purchase history, frequency and timing, you can send them various offerings for new products, develop up-sell and cross-sell opportunities, and enhance your existing relationships. Your sales team should visit these clients and develop long-term relationships with them in order to build their trust in you and your business. These are the clients you want to establish a partnership with as a trusted consultant and provider of solutions. By getting to know these clients better, as well as their business' needs and requirements, you will develop a customer relationship that will last for years. This connection will generate on-going revenue for your business and continued solutions for your client, hence a life-long customer relationship.

If you don't know your customer profiles you won't know if you are spending the appropriate time and resources with the right clients, thus resulting in an 80/20/30 scenario. So identify and profile your clients. Using a CRM (Customer Relationship Management) product to help collect and manage this information will be extremely helpful. Continue supporting your top 20% revenue generators. Move away from the bottom 30% by offering alternative fee-based services, or just stop interacting with them. And, most important, start loving your middle range clients with ways to help them improve their business, eliminate their pains, and become more successful.

Do you know what your Customer Bell Curve looks like?

Good Luck & Good Selling!

Russ Lombardo

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