Pareto Principle/Lazy Ant Experiment
The Pareto Principle, or 80/20 rule, when applied to marketing, states that only 20% of your total customers are profitable. The other 80% generally do not produce a profit. The 80/20 rule is also applicable in ant colonies, 80% of worker ants have been shown to be essentially freeloaders of the top 20% most productive ants. Split an ant colony, or take the 20% out, the same percentage of the previously lazy ants will begin to be the productive ones. Just like the 20% of an ant colony is holding the colony together, only 20% of your customers are keeping your business profitable.
What does this mean?
Think of a sports fanatic. A fanatic is most likely a season ticket holder and probably buys at least one new jersey every season, along with many other pieces of memorabilia. Fanatics are vastly different from your average fans. An average fan probably only attends one or two games per year, and maybe owns just a few pieces of memorabilia. The relation of the average fan and the fanatic isn’t pertinent in only sports markets.
As a digital marketer, if you only go after the average, you will miss the 20% subgroup, and miss profitability. You are losing a lot of money acquiring the other 80% of customers if only 20% of the total are profitable. You want to move past the aggregate and focus more on just the 20%, and in turn make your marketing much more targeted. Aggregate data is useful but has one huge flaw. An example of the flaw is the customer satisfaction metric. In a market of two customers, you look at the data and see the average review is 5. This would appear that your average customer has an average experience, but a 5 can be reached by one rating you a 10 and one rating you a 0. In this hypothetical situation, your average customer does not actually have an average experience. One had a horrible experience, one had a perfect experience. If you had many more customers, the average could be skewed even worse, which could leave you chasing an experience that no customer individually had. You want to differentiate your customer experience strategy using data.
You can segment customers to become more focused with your marketing. Some of your customers may be having a great experience and want to be more involved than they currently are. You can’t find that data by only measuring demographics of your customers and grouping them that way. You need to obtain financial data that shows the actual value of a customer once they are already involved in the business. Some metrics that display this data include Customer Lifetime Value (CLV), behavioral choice, and product/service usage patterns. Once you’ve identified your most profitable segment of customers, you can center your marketing strategies around them using product, price, method, and channel.
Identifying which features of your product/service matter the most to your profitable groups can be very important. You clearly want to continue to fulfill your loyal customers’ needs over time.
Pricing is the most important consideration because most people will say they want to pay as little as possible; however, this isn’t always applicable. Many customers, especially the most loyal, will pay more if they see a lot of value in the product. You want to find the sweet spot between frugality and inherent value when pricing the products/services.
Marketing methods, also known as touchpoints, includes the ways that your marketing reaches your customers. Some customers may prefer emails advertising the latest specials, while others may prefer to be included in additional free content, such as this blog. It’s relatively easy to see what methods are working for your customers, but you must determine whether it’s only working for your average customer or if it’s working for your most valuable 20%.
Channels are an important consideration because some forms of advertising are much more difficult to obtain necessary data from than others. Most companies don’t have anywhere near the level of data to show that a TV ad directly affects sales. Digital channels generally work better, because you can see the entire journey of a customer, from the first conversion to the conversion of referrals to the eventual time of churn.
In all markets, beating your competition for the most profitable customers is extremely important. You need to be constantly monitoring what your competitors are doing, and how well their marketing strategies are working. If you have already successfully identified your core 20% of customers, you can even leave your average customers to your competitor, as long as you are retaining and providing enough for the profitable customers.