One of the more interesting principles in developing data-based marketing, is the application of the Pareto Principle. More commonly referred to as the 80/20 rule, while sometimes referred to as the law of the vital few, or the principle of factor sparsity. The principle states that, for many events, roughly 80% of the effects come from 20% of the causes. Joseph M. Juran, a management consultant, suggested the principle. It was named after an Italian economist Vilfredo Pareto, who observed that the 80/20 correlation in land ownership. 80% of the land in Italy was owned by 20% of the population.
This observation is still alive and well, illustrated time and time again in business. One of the many ways that it can be applied, is realizing that approximately 80% of a companies' revenue is generated from around 20% of a well-defined, smaller segment of the customer base. This gives us an interesting foundation for growing our top-line revenue through segmentation.
Why is this so important in industrial marketing and how do we use it to grow our sales numbers? One word: targeting.
If we define what the customer's profile of this 20% looks like, we can utilize that to
target future customers that fit the same profile. Let's explore this a little. Your company sells a machine that does a specific task, but it can be utilized in several industries and has models in various price points. You have customer base of about 100 companies that bought from you over the last ten years. 80 of those customers made your company two million in sales. Many of these companies bought the smaller machines that are less expensive and might buy one to two of your machines over the next few years. These 80 companies are all over the map as far as industries, size, and applications are concerned. Alternately, you have 20 customers that bought multiple high-value machines. Upon further inspection, they accounted for eight million in sales for your company over the past ten years. They also all hail from the same industry and fall within a fairly tight range of size production volume. Your company adjusts its marketing and sales strategies to focus on companies that match the profile of these elite customers. In the first year, you land five new customers matching this profile. Potentially, these five new customers alone could be worth an additional two million over the next ten years-- maybe sooner.
Revenue is not the only way that this principle can be applied. It can also be applied to marketing traffic channels, content success, and even thought leadership topics. One thing is for certain, knowing who your best customers are and what makes them valuable to you, is a powerful technique when planning future strategies for your company. Especially, when a company is looking to reduce costs and increase profitability. Being able to target a much narrower demographic, reduces advertising costs, customer acquisition costs, and will result in much faster and smoother transactions with less time wasted. Contact us if you are looking to do more targeted industrial marketing: www.nesbitmarketing.com/contact