Too Much of a Good Thing
It's easy to fall in love with your best customers. They're the people who generate most of your revenue--90 percent or more--and yet they're often no more than 10 percent of your entire customer list. They're a small group, easy to manage. The question is, will they fuel your growth?
The conventional wisdom among marketers is that investing marketing dollars in best customers is smart business. It's certainly an attractive strategy, at least in the near term. You'll make fewer sales calls to meet revenue goals; loyalty is likely to be high; relationships are good. Best customers are in fact an all 'round pleasure to work with. But like Hershey bars and Jack Daniels, too much of a good thing isn't necessarily a good thing. And if you're not careful this elite group of best customers will inevitably set your business on a long low-growth path.
If, for example, your business hasn't yet lost a best customer to a merger or acquisition, your good luck is unlikely to hold for long. Best customers are being merged out of existence in every industry. They take years to develop and they're not easily replaced. And of course, even high-revenue customers you'll never lose have limits on what they can consume. In the end the customers who generate 90 percent of revenues can actually make your business vulnerable, if you allow yourself to be lulled into what we've come to call the 90/10 corner--a potentially slow-growth/no-growth sector.
Ignoring the majority of your customers is a delusional approach to sales and marketing that limits revenue growth. We describe companies that operate this way as having painted themselves into the 90/10 corner. Some simple math and some actual sales data can prove this point.
The 90/10 corner
So, how do you know whether you're at risk? How do you spot--and how do you avoid--the 90/10 corner? It's easy to spot a company in this dilemma when you plot median annual revenue per customer against some effective segmentation ranking, for example, like the company shown in Figure 1 below.
Figure 1. Distribution of revenue by Loyalty Rank
The segmentation scheme used here is Loyalty Rank, where loyalty is defined as likelihood of making another purchase in the near future. The most loyal customers are on the right. The lower performing customers are in the lower ranks to the left. You don't have to use Loyalty Rank as your segmentation scheme to see this effect; any segmentation scheme that works for you will do. The plot shows the annual revenue contribution of customers at several points along this scale. Loyalty Rank is a percentile ranking, with equal numbers of customers at each data point, so it's clear that most of the revenue comes from the very high ranking customers. The sharpness of the bend is what led us to call this revenue distribution the 90/10 corner.
Here is the important point: Readers who have studied some math will realize that the company's total revenue is directly proportional to the shaded area under the curve. The sharp corner in the lower right not only means that relatively few customers contribute most of the revenue, but also says that total revenue is low because there is not much area under the curve until you get to the 70th percentile in the rankings.
More revenue from more customers
Contrast the revenue distribution in Figure 1 with the one shown in Figure 2. This chart depicts a different company, one that has worked hard to get out of the 90/10 corner.
Figure 2. A better revenue distribution
The company shown in Figure 2 is in a different marketplace from the company in Figure 1, but it is immediately obvious that its revenue distribution is more evenly spread over the entire population of customers, and that there is more room under the curve (shaded area). As the company has pulled the middle of the curve up, its total revenue has grown dramatically.
How the second company did it
The Figure 2 company pulled itself out of its 90/10 corner by aggressive direct marketing to customers who were not in its top tier. Instead of continually going back to the very best customers for all its campaigns, the second company used predictive analytics to identify cross- and upsell candidates in the middle of the rankings. Next, it used purchase probabilities to identify which products to pitch to these customers. As a result of this customer-centric marketing, median revenue grew significantly for these customers and total revenue followed right along, increasing by $3.5 million.
The lesson here is that while your top customers are prolific revenue producers, total revenue growth is best realized by reaching out to a wider group of customers. The 90/10 corner is a trap, a deadly one that companies can avoid with smarter marketing.
Mark Klein is founder and CEO, and Arthur Einstein is vice president of marketing at Loyalty Builders, which was founded in 1999 to bring a new level of precision to the science of customer behavior. Mark Klein holds a Ph.D. in physics from Indiana University; Authur Einstein holds a BS in business from the University of North Carolina and an MA in communications from Michigan State University. Please visit Loyalty Builders.