Updated: Jul 14, 2020
The 80/20 Principle is a powerful strategy to use to identify your ideal target audience for marketing and growing your business.
Main points in the video:
1:05 Why you need to know this?
6:30 What information you need to apply 80/20 to your current customers?
9:25 What businesses will this will work for?
What 80/20 basically tells us that 80% of what you're doing is a waste of time - you know 80% of the customers that you're talking to our waste of time.
80% of your inventory is a waste and the reason is because everybody thinks everybody is their customer. But the 80/20 being that it's a principle we understand that that's not true and as an example you know we know that 20% of your customers generate 80% of your revenue.
You know and the real power is that when you start applying it to that because 80/20 is fractal and that what that means is you know 20% of the 20% which is 4% generates 80% of the 80% or 64 percent.
When you start you start drilling down the real power is when you when you get down into those fractal numbers I like applying it to the top 5% or even the top 1% of your customers.
What are some of the reasons that we will want to know this why do we even want to know who the top 5% or 1% are at all?
Well, so we know how to keep one take care of them so you know when your top 10% or 5% or 1% of customers if they're spending 16 times more than your average customer how are you going to take care of them so they actually remain a customer.
The other reason is to figure out how to find more like them.
Now let's you know they're in a group if they're you know thinking about this one customer that we've had one client that we've had right they had what five thousand five thousand customers what they're tough and their average was $120
What their top 20 people spent what nine times the average they spent about $1,000 and a couple people spent 25 times that.
So if that person called you should know them by name you know should know how to take care of them are you gonna or how's your staff going to take care of them.
You start asking questions like why yeah I mean and this was a game room right I mean this was so you know you have to start asking yourself and that's really what happened with Paul the customer were talking about is he started thinking differently.
You know why do I have you know ten customers spending a thousand dollars each you know what's different about them and I think when he started looking at that I don't remember the debt exactly but I think you know there were probably what four or five different sources.
You know of where these customers came from really was the three main groups that we ended up having that would change his work right changed his marketing. Basically he was doing some mass media stuff that didn't make sense he's promoting things he was trying to get customers in that he didn't really want as customers.
After he looked at this because they were a problem they didn't spend a lot of money and they kind of were hard on his staff so like that was an obvious thing to change stop marketing to them stop having promotions for them go after the people that are actually your best customers.
He actually got more serious about collecting and utilizing email addresses and started starting to send nurturing emails to those top 5% or one person actually came out to less than one percent I was I was customers where his ideal type customers.
It made him started thinking different and it started spending as money differently it's kind like we've talked about we've had restaurants you know that we work with that you know they'll you know the average restaurant probably their customers come from what 10 mile radius well you know we had you know we've got restaurants we've seen out there that they'll get on regional radio you know so they're going out you know fifths and many five miles you know and exposing themselves to maybe half a million people they're wasting their wasting 99% of their money on people who aren't even going to come - don't know who they are don't know where they are and I'm gonna drive 25, 50, 70 miles to come their restaurant yeah how many restaurants are in between them and that restaurant probably like yeah exactly you know so and
We talk about this like the other day we were talking and I'm driving home from an errand and I'm driving up over my dog and here's this billboard for this huge car dealer there was there was no call to action there was no the message all it said was you know where the family based used-car dealer.
You know I don't know what that billboard cost but I know in my day that was a twenty-four, twenty-five hundred dollar a month billboard I want to waste the money you know if you want to if you wanna spend that kind of money find out who your top customers are spine find out who the four percent are that are spending 16 times the average customer and start spending your money on those customers instead.
So I read an interesting article about fractals and I one way that this author wrote about fractals was is like their Russian nesting dolls like and you can find it kind of you like all your clients all your customers is the big Russian nesting doll and you really want to get down to that very little tiny little baby Russian nesting doll keep opening that up that's the ones you really want to figure out how do I find more like them because they're while there's tiny they're the ones that are the big player for you.
They're providing for your family for your and your staff right and they're the ones that you really want to go figure out how do I find where are they what category are they may be and how do I guys how do I go find more just like them.
How hard is it for us to go into a business and help them to identify and isolate their top customers just with it right hopefully they have data-rate what guys you need to need some data maybe the last year's revenue all your customers were and if you have if you have more than one year that'd be great like three years would be even better.
Depending on what you're selling right you're selling a big thing your might want three to five years worth of data but if you even if it's on a spreadsheet a basic spreadsheet is all we need to get started right with their name in my mail right how much they spent really: frequency, recency and the amount that they spent
All you need is the customers name and their revenue and I think I think the last 12 months really I mean.
If you really want to keep it simple just keep it simple look at the last 12 months and give us that and all of a sudden you know in an Excel spreadsheets extremely easy to categorize it with a push of a button and you can now see all right look at this you know here I've got 200 customers 10 of them are generating you know 80% of my of my income then you begin to think you guys to a question you begin to think well how much my inventory my keeping in stock for these other hundred and ninety customers and how if I eliminated that vast majority and I eliminated worrying about those customers and I limited most of that inventory how much more cash would that put in my pocket that I could spend in other areas but it's so simple to do it doesn't take that long.
To really figure out who you know what other things about your ideal type customers you know like we did with Paul and we've done with a number of our customers is you there are other things that you might look at for example in a restaurant it might be you know who are your top tippers right or you know there's that what do we call that the cringe factor you know yeah thing to think about is this you know we talked about restaurants a lot because it's very easy for people to understand but this works for you know manufacturers this works for anybody because if you're dealing with people they're gonna have people that are gonna be maybe not the best to work with right there's lots of examples with people that deal with a big player retail businesses that are not nice to deal with and are they really worth it are they worth the hassle you know so yeah and actually this works so much better for a higher ticker items you know we're especially you have higher gross profit margins things like manufactures machine shops no business-to-business type works even better because you're talking about you know one customer maybe in the hundreds of thousands of dollars and you're you know your lower customers your average customers might only be in the thousands dollars.
When it really start to stand out for somebody say holy crap you know why am I wasting my time over here on these eighty percent yeah let's start let's start nurturing that's twenty percent of this five percent and let's start duplicating them and once you've got that data as you said it's very easy to start duplicating putting a marketing strategy together you know as a good go to market plan and now start duplicating them and instead of having to take care of two hundred customers for X amount of dollars you might have to take care of fifty customers for the same amount.
All of a sudden your profit margins go up because you're not going to have the number of expenses used to have you're not gonna have to have the inventory you used to have you're not gonna have to spend the kind of money you used to spend on marketing to get this big wide market now you'd narrow it down once you start understanding and applying the 80/20 principle life just gets so much simpler profit margins start you know going up exponentially.